In a monopoly, what mainly determines the price of the good?

In a monopoly, what mainly determines the price of the good?

• A. The government sets the price in a monopoly.
• B. Prices are determined by the average cost of production.
• C. The single firm sets the price (subject to demand).
• D. Prices are determined by international exchange rates.

Answer: (C)

The key idea is that in a monopoly the seller is a price maker, using the demand for the product as the constraint. With no competition, the firm can set any price along the downward-sloping demand curve by choosing the quantity to produce. The profit-maximizing point is where marginal revenue equals marginal cost, which determines the quantity and places the corresponding price on the demand curve. So the price is mainly determined by the firm’s pricing decision, not by government setting, average-cost pricing, or exchange rates.

The key idea is that in a monopoly the seller is a price maker, using the demand for the product as the constraint. With no competition, the firm can set any price along the downward-sloping demand curve by choosing the quantity to produce. The profit-maximizing point is where marginal revenue equals marginal cost, which determines the quantity and places the corresponding price on the demand curve. So the price is mainly determined by the firm’s pricing decision, not by government setting, average-cost pricing, or exchange rates.