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A certain town in the Midwest obtains all of its electricity from one company, North star Electric. Although the company is a monopoly, it is owned by the citizens of the town, all of whom split the profits equally at the end of each year. The CEO of the company claims that because all of the profits will be given back to the citizens, it makes economic sense to charge a monopoly price for electricity. True or false? Explain.
Answer: False. Explanation: Monopoly pricing sets the quantity at the level where marginal revenue equals marginal cost. However at this level, even though profits are maximized, the price is greater than the marginal revenue (since the demand curve is downward sloping) and therefore greater than marginal cost. Hence the profit maximizing quantity for the monpolist is not socially efficient as the marginal cost of producing another unit of…

tricity is less than the price that the monopolist will receive from it. Even if the monopoly profits are distributed among the citizens, the output and price charge d by the monopolist is still socially inefficient. To maximize efficiency and social surplus the company should produce Q till P=MC.

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