Where is the socially optimal quantity on a monopoly graph?

• A. It occurs where MR = MC
• B. It occurs where price equals MC
• C. It occurs where MC equals zero
• D. It occurs where price = the additional cost of producing those units (MC=0)

Answer: (D)

The quantity that maximizes total welfare is found where marginal social benefit equals marginal social cost. In a graph, marginal social benefit is the price consumers are willing to pay, shown by the demand curve, and marginal social cost is the marginal cost of producing that unit.

Under a monopoly, the firm sets output where marginal revenue equals marginal cost, not where marginal benefit equals marginal cost. That makes the monopoly produce too little from a societal standpoint.

So the socially optimal point is where price equals marginal cost (the demand price at that quantity equals MC). At that quantity, MB = MC and total surplus is maximized.

The idea that the socially optimal condition requires MC to be zero is not correct, since MC generally is positive and dictates the balancing point with MB.