A profit-maximising firm with market power is most likely to use that market power to

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BlackTom AI · Accepted Answer

The question asks how a profit-maximising firm with market power is most likely to use that market power.
Option A: 'charge higher prices than firms with little market power' — This is the core idea of market power: the ability to set prices above marginal cost due to reduced competition, leading to higher profits. This option correctly reflects the typical use of market power.
Option B: 'improve the allocation of resources' — In general, market power reduces competition and can lead to x-inefficiency and allocative inefficiency. Firms with market power do not typically improve resource allocation; they often distort it by charging higher prices and producing less than the socially optimal output.
Option C: 'increase the elasticity of its supply curve' — Supply elasticity is influenced by production technology, costs, and factor mobility, not directly by the firm exploiting market power. A monopolist’s pricing power does not inherently make its supply more elastic; in fact, the firm may face a downward-sloping demand and still have limited responsiveness to price changes in quantity supplied.
Option D: 'charge customers for its negative externalities in production' — While internalizing externalities can be desirable, this is not the primary or typical tool used by a market-powerful firm to exercise its power. Pricing externalities is more about regulation (Pigouvian taxes or fines) or social planning, not the standard strategic use of market power by the firm itself.
In summary, the most direct and characteristic use of market power for a profit-maximising firm is to set higher prices relative to competitive firms, capturing the supra-competitive profits that arise from reduced competition.

A profit-maximising firm with market power is most likely to use that market power to

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