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Question
Macroeconomics
Posted 3 months ago

Selena's Sandwiches operates in a monopoly and sells 100 sandwiches for $10\$ 10 each.

Based on this information, which of the following can we be certain is true?

Choose 1 answer:
(A) The socially optimal quantity in this market is 100 .
(B) The market is allocatively efficient.
(c) The marginal cost of the 100th 100^{\text {th }} sandwich is less than $10\$ 10.
(D) There is no deadweight loss in this market.
(E) Average total cost is minimized.
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Answer from Sia
Posted 3 months ago
Solution
a
Monopoly and Allocative Efficiency: In a monopoly, the price is typically set above the marginal cost, which means that the market is not allocatively efficient. Allocative efficiency occurs when the price equals the marginal cost (P = MC)
b
Socially Optimal Quantity: The socially optimal quantity is where the marginal cost (MC) equals the marginal benefit (MB), which is also the demand curve (D). Without additional information about the MC and MB, we cannot confirm if 100 sandwiches is the socially optimal quantity
c
Marginal Cost of the 100th Sandwich: If the firm is a profit-maximizer, it will produce where marginal revenue (MR) equals marginal cost (MC). In a monopoly, MR < Price. Since the price is 10,MRmustbelessthan10, MR must be less than 10, and for profit maximization, MC must equal MR, which is less than $10
d
Deadweight Loss: Monopolies typically produce less than the socially optimal quantity, leading to a deadweight loss, which is the loss of economic efficiency when the equilibrium outcome is not achievable or not achieved
e
Average Total Cost Minimization: Without information on the firm's cost structure, we cannot determine if the average total cost (ATC) is minimized at the production of 100 sandwiches
Answer
(C) The marginal cost of the 100th100^{\text{th}} sandwich is less than $10.
Key Concept
Marginal Revenue and Marginal Cost in Monopoly
Explanation
In a monopoly, the firm maximizes profit by producing the quantity where marginal revenue equals marginal cost. Since the price is higher than the marginal revenue, and the firm sells the product at a price of 10,themarginalcostofthelastunitmustbelessthan10, the marginal cost of the last unit must be less than 10.

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