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Is it possible that in monopoly, efficient scale is smaller than profit-maximizing quantity?

Accounting Dec 08, 2020

Is it possible that in monopoly, efficient scale is smaller than profit-maximizing quantity?

Expert Solution

It is possible that in a monopoly, efficient scale is smaller than profit-maximizing quantity.

With a monopoly, the profit-maximizing quantity is such that the marginal cost of the last unit produced is equal to the marginal cost. The efficient scale, however, is the production level where average total cost is minimized. The efficient scale occurs when average total cost is equal to marginal cost. Therefore, the efficient scale will be smaller than the profit-maximizing quantity when average total cost is equal to marginal cost at a point that is below the marginal revenue curve.

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