Which of the following scenarios best represents the pricing behavior of a monopolist?

• A. A firm faces perfectly elastic demand and cannot influence the market price.
• B. A firm accepts the market price as given and sells as much as it wants at that price.
• C. A firm sets its price equal to marginal cost to maximize social welfare.
• D. A firm sets its price above marginal cost and reduces output to maximize profit.

Answer: (D)

Verified step by step guidance

1. Understand the characteristics of different market structures, focusing on how firms behave in terms of pricing and output decisions.
2. Recall that a monopolist is a single seller in the market with market power, meaning it can influence the price by adjusting the quantity it supplies.
3. Recognize that a monopolist faces a downward-sloping demand curve, so it must choose a price and quantity combination that maximizes its profit, unlike firms in perfectly competitive markets.
4. Know that a monopolist sets its price above marginal cost because producing where price equals marginal cost would not maximize profit; instead, it restricts output to raise the price.
5. Compare the given options to these characteristics and identify that the scenario where the firm sets its price above marginal cost and reduces output to maximize profit best describes a monopolist's pricing behavior.