Why is a single-price monopoly inefficient?
What will be an ideal response?
In a competitive market, the supply curve is the marginal social cost curve for society, and the demand curve is the marginal social benefit curve to society. The perfectly competitive market is efficient because production occurs where the quantity supplied equals the quantity demanded so that MSB = MSC. The monopolist is inefficient because price exceeds marginal cost at the quantity of output the monopoly produces. When the monopoly equates MC = MR to choose the profit-maximizing level of output, it charges a price from the demand curve that is greater than marginal cost, which means MSB > MSC. Consumer and producer surplus are not maximized and society suffers a deadweight loss.
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Recall the Application. When applying the Taylor Rule to the decade of 2000, economist John Taylor found that compared to past experience, the Fed
A) raised interest rates much too high and much too quickly. B) should have maintained interest rates instead of raising them slowly. C) should have lowered interest rates at a much faster pace. D) was much too aggressive in lowering interest rates.
In the fooling model, real wages
A) are countercyclical. B) are procyclical. C) are constant. D) show no clear cyclical pattern.