Reading 19: Monopoly

LOS a: Describe the characteristics of a monopoly, including factors that allow a monopoly to arise, and monopoly price-setting strategies

1.Which of the following statements about monopolies is most accurate?

A)   A monopolist's optimal production quantity is at the point where marginal revenue equals marginal cost.

B)   Monopolists charge the highest possible price.

C)   Monopolists always make a profit.

D)   A monopoly structure is characterized by a well-defined product for which there are no good complements.

The correct answer was A)

All firms maximize profits where MR = MC. Because of a downward-sloping demand curve and high barriers to entry, monopolists can charge a price higher than MC. Like other price searchers, monopolists take price from the demand curve (at the quantity where MR=MC).

The other statements are false. A monopoly structure is characterized by a well-defined product for which there are no good substitutes. A monopolist will earn a profit as long as the demand curve lies above the average total cost curve (ATC) at the optimal quantity point. Monopolists want to maximize profits, not price.