Monopolies' market power is limited by

• A. Regulatory caps
• B. Supply constraints
• C. Competition from substitute products
• D. The demand curve

Answer: (D)

A monopoly’s power to set prices is limited by how much buyers are willing to purchase at different prices, which is shown by the demand curve. Since the demand curve slopes downward, raising price reduces the quantity sold. To maximize profit, the monopolist chooses a quantity where marginal revenue equals marginal cost, and then uses the demand curve to translate that quantity into the price charged. In short, the demand curve bounds the feasible price–quantity outcomes and, through how buyers respond to price changes, determines the extent of the monopoly’s power.