Monopoly output and price, judged by efficiency

Efficiency calls for producing every unit whose value to buyers (price on the demand curve) is at least its marginal cost, which means producing where P = MC.

A monopolist faces a downward-sloping demand curve, so its marginal revenue is below price. It produces where MR = MC. Since MR is below demand, that crossing happens at a smaller quantity than the one where demand meets MC. Then it charges the price on the demand curve above that smaller quantity, which is higher than marginal cost.

So compared with the efficient outcome, a monopolist makes too little and charges too much, and the units it leaves unmade are a deadweight loss.

Each choice

• A. Both parts are backward. A monopolist restricts output below the efficient amount, which is what lets it raise price.
• B. The price part is right but the quantity part is not. Charging a high price and selling a lot cannot both happen on a downward-sloping demand curve.
• C. The output part is right, but selling fewer units on a downward-sloping demand curve means a higher price, not a lower one.
• D (correct). MR lies below demand, so MR = MC is reached at a smaller quantity, with price above marginal cost.
• E. This assumes the monopolist's profit rule is the efficiency rule. Profit comes at MR = MC, but efficiency needs P = MC, and for a monopolist P is above MR.