Do monopolies have unlimited market power?

• A. Yes
• B. No, they are limited by the demand curve
• C. Only in small markets
• D. They can set any price

Answer: (B)

Monopolies have power, but it’s limited by what consumers are willing to buy at different prices. Because the monopolist faces a downward-sloping demand curve, selling more units requires lowering the price on all units. That makes marginal revenue smaller than the price, so there’s a real trade-off between price and quantity. If the price gets too high, demand collapses and sales fall to zero. Profit is maximized where marginal revenue equals marginal cost, and the price charged comes from the demand curve at that quantity. So their power isn’t unlimited—the demand curve sets the upper bound and shapes how much profit they can extract.