Which of the following statements is correct with regard to monopolies?

• A. A monopoly can set the market price by controlling the quantity supplied.
• B. Monopolies face perfectly elastic demand curves.
• C. In a monopoly, there are many firms competing in the market.
• D. Monopolies always produce at the socially optimal level of output.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the nature of a monopoly. A monopoly is a market structure where a single firm is the sole producer of a good or service with no close substitutes.
2. Step 2: Analyze the demand curve faced by a monopoly. Unlike perfectly competitive firms, a monopoly faces the entire market demand curve, which is typically downward sloping, meaning the firm can influence the market price by adjusting the quantity supplied.
3. Step 3: Evaluate the statement about perfectly elastic demand curves. Perfectly elastic demand means the firm is a price taker and cannot influence the price, which applies to perfectly competitive markets, not monopolies.
4. Step 4: Consider the number of firms in a monopoly. By definition, a monopoly consists of only one firm, so the statement about many firms competing is incorrect.
5. Step 5: Reflect on the social optimality of monopoly output. Monopolies tend to produce less and charge higher prices than socially optimal levels, leading to allocative inefficiency, so they do not always produce at the socially optimal output.