How do monopolists maintain high prices?
A. By setting prices equal to marginal cost
B. By competing with many other firms
C. By restricting output to create artificial scarcity
D. By producing more goods than the market demands
Answer (2)
Monopolists maintain high prices by restricting output to create artificial scarcity. This allows them to charge higher prices as they control the supply in the market. Thus, the correct option is C.
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The question of how monopolists maintain high prices is related to economic theories surrounding market structures. A monopolist is a firm that is the sole provider of a particular good or service in a market, giving it significant market power and control over prices.
In the options provided, the correct choice is:
(C) By restricting output to create artificial scarcity
Here's a detailed explanation:
Market Power of Monopolies:
Monopolists have control over their prices because they are the only producers in their market. This allows them to set prices higher than in more competitive markets.
Restricting Output:
To maintain high prices, monopolists often produce less than the total amount demanded at lower prices. By limiting the supply of their product, they create an artificial scarcity.
Price Above Marginal Cost:
In contrast to competitive markets where prices are often set equal to marginal cost, monopolists set prices above marginal costs. The lack of competition means they don't need to price their goods at the lowest possible cost to attract consumers.
Economic Rationale:
By restricting output, monopolists ensure that the demand remains greater than supply, enabling them to charge higher prices. Consumers who value the good more are willing to pay the elevated prices.
Absence of Competition:
Since by definition, a true monopolist faces no competition, they do not need to compete with other firms to attract buyers, allowing them more flexibility in controlling prices and supply.
Understanding how monopolists maintain high prices through output restriction helps explain why monopolies are often subject to regulation to prevent market abuse and protect consumer interests.
