The correct answer is: D. By imposing a price ceiling below the current equilibrium price
A price ceiling is a legal maximum price that can be charged for a good or service. When a price ceiling is imposed below the equilibrium price, it will cause a shortage of the good or service. This is because the quantity demanded at the price ceiling will be greater than the quantity supplied.
In a monopolistic market, the monopolist will produce at the point where marginal revenue equals marginal cost. This will result in a price that is higher than the competitive price and a quantity that is lower than the competitive quantity.
If a price ceiling is imposed below the monopolist’s equilibrium price, it will cause the monopolist to produce more output. This is because the monopolist will now be able to sell more units at the price ceiling than it could at the equilibrium price.
However, the price ceiling will still be above the competitive price, so the monopolist will still produce less output than would be produced in a competitive market.
In conclusion, a price ceiling below the current equilibrium price will improve market efficiency by increasing output and reducing the deadweight loss associated with monopoly.
Here is a brief explanation of each option:
- A. By levying tax per unit of production
A tax per unit of production will shift the monopolist’s marginal cost curve up. This will cause the monopolist to produce less output and charge a higher price.
- B. By levying sales tax per unit
A sales tax per unit will shift the monopolist’s demand curve down. This will also cause the monopolist to produce less output and charge a higher price.
- C. By levying profit tax
A profit tax will not affect the monopolist’s marginal cost or demand curves. However, it will reduce the monopolist’s profits. This may cause the monopolist to produce less output, but it will not necessarily cause the price to change.
- D. By imposing a price ceiling below the current equilibrium price
A price ceiling below the current equilibrium price will cause the monopolist to produce more output and charge a lower price. This will improve market efficiency by increasing output and reducing the deadweight loss associated with monopoly.