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Principles of Economics- Mankiw (5th) 319

Principles of Economics- Mankiw (5th) 319 - CHAPTER 15 M O...

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CHAPTER 15 MONOPOLY 329 would choose. As we have seen, the monopolist chooses to produce and sell the quantity of output at which the marginal-revenue and marginal-cost curves in- tersect; the social planner would choose the quantity at which the demand and marginal-cost curves intersect. Figure 15-8 shows the comparison. The monopolist produces less than the socially efficient quantity of output. We can also view the inefficiency of monopoly in terms of the monopolist’s price. Because the market demand curve describes a negative relationship between the price and quantity of the good, a quantity that is inefficiently low is equivalent to a price that is inefficiently high. When a monopolist charges a price above mar- ginal cost, some potential consumers value the good at more than its marginal cost but less than the monopolist’s price. These consumers do not end up buying the good. Because the value these consumers place on the good is greater than the cost of providing it to them, this result is inefficient. Thus, monopoly pricing prevents
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