A pure monopoly may generate economic profits because:

• A. it operates in a perfectly competitive market
• B. it faces no close substitutes and has significant barriers to entry
• C. it always produces at the socially optimal output level
• D. it cannot influence the market price of its product

Answer: (B)

Verified step by step guidance

1. Understand the characteristics of a pure monopoly: it is a single seller in the market with no close substitutes for its product and significant barriers to entry that prevent other firms from entering the market.
2. Recall that in a perfectly competitive market, firms are price takers and cannot influence the market price, which contrasts with a monopoly that can set prices due to lack of competition.
3. Recognize that economic profits occur when a firm can set prices above average total cost in the long run, which is possible for a monopoly because of its market power and barriers to entry.
4. Note that a monopoly does not necessarily produce at the socially optimal output level (where price equals marginal cost), but rather at a quantity that maximizes its own profit, often resulting in higher prices and lower output than in competitive markets.
5. Conclude that the reason a pure monopoly may generate economic profits is because it faces no close substitutes and has significant barriers to entry, allowing it to maintain market power and earn profits over time.