CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

Which of the following is (are) source(s) of economic inefficiency that arise under a monopoly?

I. Since legally protected monopolists can often earn economic profit, government protection of monopoly producers will encourage rent-seeking activities.
II. A monopolist will fail to expand output to the level where the consumer's valuation of the marginal unit equals the producer's cost of producing the unit.
III. Monopoly reduces the ability of consumers to discipline the seller of a product.
A. I and II
B. II and III
C. I, II, and III
Explanation: Monopolies are inefficient because of barriers to entry which imply that monopolists are not subject to the discipline of competition. Since monopolists produce where P > MC, the monopolist does not expand output to the point where the consumer's valuation of the marginal unit equals the producer's cost of the unit. Finally, since there are profits available under monopoly organization, producers will use their resources to lobby politicians to allow them to operate as monopolies.

User Contributed Comments 2

User Comment
nzdavid Rent-seeking is an attempt to derive economic rent by manipulating the social or political environment, rather than by adding value
jocerdap good comment
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