A Level Economics AQA Practice Exam

What is a consequence of a monopolist pricing above marginal cost?

1. Increased market demand

2. Higher profits for the monopolist resulting in inefficiencies

3. Lower consumer prices

4. Enhanced competition in the market

The correct answer is: Higher profits for the monopolist resulting in inefficiencies

When a monopolist sets its prices above marginal cost, it typically results in higher profits for the monopolist. This pricing strategy allows the firm to maximize its profit per unit sold, since it can restrict output to a level where the price exceeds the marginal cost of production. The inefficiencies arise because the monopolist produces less than the socially optimal level of output. In a perfectly competitive market, prices tend to equal marginal costs, ensuring that resources are allocated efficiently. However, a monopolist's ability to control prices leads to a deadweight loss in the market, as consumers who would be willing to pay a price higher than the marginal cost but lower than the monopolist's price are unable to buy the product. This creates an overall inefficiency in the economy where fewer transactions occur than would be optimal for societal welfare. The other outcomes are not accurate in the context of monopolistic pricing above marginal cost. For example, a monopolist will not see increased market demand from higher prices; rather, demand may decrease because fewer consumers can afford the higher price. Lower consumer prices are incompatible with a monopolistic pricing strategy, which is characterized by setting higher prices. Finally, enhanced competition tends not to occur in a monopolistic market because the monopolist's pricing