Monopolies use their market power to:

• A. set prices above marginal cost
• B. produce at the socially optimal output level
• C. maximize consumer surplus
• D. ensure perfect competition in the market

Answer: (A)

Verified step by step guidance

1. Understand the concept of market power: A monopoly is a single seller in the market with significant control over the price of its product, unlike firms in perfect competition which are price takers.
2. Recall the profit-maximizing condition for a monopoly: A monopolist maximizes profit where marginal revenue (MR) equals marginal cost (MC), not where price equals marginal cost as in perfect competition.
3. Recognize the implication of this condition: Since MR < Price for a monopolist, the price set by the monopolist is above marginal cost, leading to higher prices than in competitive markets.
4. Consider the social welfare aspect: Because the monopolist restricts output to raise prices, the quantity produced is less than the socially optimal output level, which would be where price equals marginal cost.
5. Conclude that monopolies do not maximize consumer surplus or ensure perfect competition; instead, they use their market power to set prices above marginal cost.