Monopolies can influence prices by which of the following?

• A. They Can Set Extortionate Prices
• B. They Cannot Influence Prices
• C. They Must Share Markets with Rivals
• D. They Always Decrease Quality

Answer: (A)

Monopolies have pricing power because they’re the single seller in the market with no close substitutes and high barriers to entry. That power lets the firm choose the quantity that maximizes profit and then set a price on the demand curve, often above what would prevail in a competitive market. In other words, the lack of competition lets a monopolist influence prices, sometimes charging extortionate prices relative to a competitive scenario.

The idea that they cannot influence prices is incorrect, since competition would push prices toward marginal cost. The notion of sharing markets with rivals doesn’t fit a monopoly, where there isn’t a close rival to constrain the price. And while quality can vary, there’s no rule that monopolies always decrease quality; pricing power doesn’t deterministically dictate quality.