How do monopolies differ from firms in perfect competition, and what effect does that have on prices?

• A. Monopolies have a single seller and higher prices; perfect competition has many sellers, lower prices and more choices.
• B. Monopolies have many sellers and high prices; perfect competition has a single seller and low prices.
• C. Monopolies and perfect competition both have no effect on prices.
• D. Monopolies increase consumer choices; perfect competition reduces prices.

Answer: (A)

Monopoly versus perfect competition changes how prices are set. In a monopoly, there is a single seller that controls the market and faces little or no competition. Because there aren’t close substitutes and barriers keep others out, the firm can set a higher price and choose a quantity that maximizes its profit, resulting in higher prices for consumers and fewer options.

In a perfectly competitive market, many sellers offer identical products, and none can influence the price. Firms take the market price as given, and competition pushes price down toward the level of marginal cost. With more sellers and no single firm able to raise prices, prices stay lower and a wider range of choices is available to buyers.

That’s why the correct view is that monopolies involve a single seller with higher prices, while perfect competition involves many sellers with lower prices and more choices. The other statements misstate how many sellers exist or how prices behave in each market structure.