Which one among the following pairs of type of firm and feature is not correctly matched?
- AOption (a)
Oligopoly firm : Interdependence in decision-making
- BOption (b)
Monopolistic firm : Firm is a price setter
- COption (c)
Monopoly firm : Produces an efficient level of output
- DOption (d)
Perfectly competitive firm : Produces socially optimum output
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Correct answer
Monopoly firm : Produces an efficient level of output
Why this answer is correct
The correct answer to the question is Option 3: Monopoly firm : Produces an efficient level of output.
This pair is not correctly matched because monopolies are inherently inefficient in their production levels compared to the social optimum.
Detailed Analysis of the Pairs
| Pair | Type of Firm | Feature | Evaluation |
|---|---|---|---|
| 1 | Oligopoly | Interdependence in decision-making | Correct: In markets with few large firms, the actions of one (like a price cut) directly impact others, forcing firms to react strategically to their rivals. |
| 2 | Monopolistic | Firm is a price setter | Correct: Whether it refers to Monopolistic Competition (differentiated products) or a Pure Monopoly, these firms have market power and can choose their price, unlike price-takers. |
| 3 | Monopoly | Produces an efficient level of output | Incorrect: Monopolies maximize profit by restricting output to a level where Price > Marginal Cost. This results in underproduction and "deadweight loss," making it inefficient. |
| 4 | Perfectly Competitive | Produces socially optimum output | Correct: These firms produce where Price = Marginal Cost. This is the point of allocative efficiency, where the benefit to society equals the cost of production. |
Why Monopolies are Inefficient
In a monopoly, the firm produces less output and charges a higher price than what would occur in a perfectly competitive market. Because they do not produce at the point where the cost of the last unit equals the value consumers place on it (Price), they fail to achieve allocative efficiency.
The "Socially Optimum" point is where the Demand curve (Marginal Benefit) intersects the Marginal Cost curve. A monopoly always stops producing before reaching this point to keep prices high and maximize its own profit.