What is a monopoly?

• A. Many firms competing on differentiated products
• B. One firm produces all the output in a market
• C. A few firms share the market and set output
• D. A government regulator sets prices

Answer: (B)

A monopoly is a market in which a single firm supplies the entire output of a good or service in a market. With no close substitutes and high barriers to entry, this firm faces the whole market demand and can influence the price. The monopolist maximizes profit by choosing the quantity where marginal revenue equals marginal cost, then sets a price based on the demand curve. Because there’s no competition pushing prices down or outputs up, the price is typically higher and the quantity lower than in a competitive market, which can lead to deadweight loss. Barriers to entry—like control of a key input, economies of scale, or legal rights—help maintain this single-seller situation. The other descriptions refer to different market structures: many firms with differentiated products describe monopolistic competition; a few firms sharing the market describe an oligopoly; and a government regulator setting prices describes price regulation, not the defining setup of a monopoly.