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

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BlackTom AI · Accepted Answer

When evaluating how a profit-maximising firm with market power behaves, we examine what each option implies about its pricing and resource allocation.
Option A: 'improve the allocation of resources' suggests a more efficient, welfare-maximising outcome. In markets with marked power (like a monopoly), the firm typically Restricts output to raise price, which often leads to a misallocation of resources relative to perfect competition. This makes the claim dubious in most market-power scenarios.
Option B: 'charge higher prices than firms with little market power' directly mirrors the core consequence of market power: the ability to set prices above marginal cost, leading to higher prices for consumers compared with more competitive markets. This is a hallmark of profit-maximising behavior under market power.
Option C: 'increase the elasticity of its supply curve' would imply making supply more responsive to price changes. In many models of market power, the supply curve faced by the firm is not inherently made more elastic by having market power; price-setting power more often affects the demand side and output level, not the basic slope of the firm’s own supply curve.
Option D: 'charge customers for its negative externalities in production' would be about internalising externalities through pricing. While some models discuss Pigouvian taxes or charges, a profit-maximising firm with market power does not automatically implement charges for negative externalities as a standard outcome of market power alone; that behavior depends on regulation and policy incentives rather than inherent market-power exploitation.
In summary, only the second option aligns with the typical strategic use of market power to pursue higher prices, while the others describe effects or motivations that are not the primary, default consequence of possessing market power in a profit-maximising framework.

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

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