Multiple Choice
Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly?
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12. Monopoly
Characteristics of Monopoly
Multiple Choice
If a monopoly or a monopolistic competitor raises their prices, then:
A
they must lower prices to remain in business
B
they will immediately lose all customers to competitors
C
they may lose some customers, but can still maintain market power due to lack of close substitutes
D
the market price will be determined by the intersection of supply and demand curves
Verified step by step guidance1
Understand the nature of a monopoly or monopolistic competition: these market structures have some degree of market power, meaning they can influence the price of their product rather than being price takers.
Recall that in perfect competition, firms are price takers and raising prices would cause them to lose all customers immediately, but this is not the case for monopolies or monopolistic competitors due to product differentiation or lack of close substitutes.
Recognize that when a monopoly or monopolistic competitor raises prices, the demand curve they face is downward sloping, so they may lose some customers but not all, because consumers do not have perfect substitutes to switch to immediately.
Understand that the market price in these cases is not determined by the intersection of supply and demand curves in the same way as in perfect competition, because the firm has control over price and quantity decisions.
Conclude that the correct statement is that they may lose some customers but can still maintain market power due to the lack of close substitutes, which explains why they do not have to lower prices to remain in business.
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