Which of the following is true? a) A monopoly firm is a price-maker

1. Which of the following is true?

a) A monopoly firm is a price-maker.

• A monopoly is characterized by being a sole firm in the market supplying the good or service without any close substitute. The monopoly has no competitors and has high entry barriers into the market. For the other market structures, profit is maximized at the point where MR = MC however, the monopolist will charge a price > marginal revenue. Hence, a monopoly is a price-maker due to the absence of competition from other firms and can charge high prices for as long as the consumer is willing to pay.

So, option a. is correct.

Explain of other options:

b) MR = P if the demand curve is downward sloping.

• MR = P for a perfectly competitive market only. For the monopoly, the MR curve has a different slope than the demand curve and therefore, MR is not equal to P.

c) MR = MC is a profit-maximizing rule for firms in perfect competition only.

• The condition for profit maximization for all market structures is MR = MC and not just for the perfect competition.

d) Monopolies tend to charge lower prices than perfectly competitive firms.

• A monopoly is a price maker while the perfectly competitive firms are price takers. This means the monopoly has the power to set higher prices or produce less quantity of the commodity since it is the only firm producing the good or service.