Multiple Choice
Which of the following is the main problem with using a market test as a forecasting tool in determining market equilibrium?
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3. The Market Forces of Supply and Demand
Market Equilibrium
Multiple Choice
Which ability or function of a company most strongly suggests it may hold monopoly power?
A
The ability to set prices above marginal cost without losing all customers
B
The ability to produce at the lowest average cost in the industry
C
The ability to advertise its products effectively
D
The ability to respond quickly to changes in consumer preferences
Verified step by step guidance1
Understand the concept of monopoly power: Monopoly power refers to a firm's ability to influence the market price of its product, typically by restricting output or differentiating its product so that it faces little or no competition.
Recall that in a perfectly competitive market, firms are price takers and must accept the market price, which equals marginal cost (MC). Therefore, they cannot set prices above MC without losing all customers.
Identify that a firm with monopoly power can set prices above marginal cost because it faces a downward-sloping demand curve and does not lose all customers when it raises prices.
Evaluate the given options by comparing them to the defining characteristic of monopoly power: the ability to set prices above marginal cost without losing all customers.
Conclude that the ability to set prices above marginal cost without losing all customers most strongly suggests monopoly power, as it directly reflects market power and the lack of perfect competition.
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