Question

Given below are two statements: one is labelled as Assertion A and the other is labelled as Reason R. Assertion A: Monopoly power is the ability to set price above marginal cost and that the amount by which price exceeds marginal cost depends inversely on the elasticity of demand. Reason R: Monopoly power is determined with the more number of firms in the market.

• A. Both A and R are correct and R is the correct explanation of A
• B. Both A and R are correct but R is NOT the correct explanation of A
• C. A is correct but R is not correct
• D. A is not correct but R is correct

Hint:

Monopoly power is higher when demand is less elastic and competition is weak. More firms usually reduce monopoly power.

Answer 1

The Correct Option is C

Concept: Monopoly power means the ability of a firm to influence price. A monopolist can set price above marginal cost because it faces a downward sloping demand curve.

Step 1: Check Assertion A.
Assertion A says that monopoly power is the ability to set price above marginal cost. This is correct. \[ P>MC \] Also, the gap between price and marginal cost depends inversely on the elasticity of demand. If demand is less elastic, monopoly power is higher. \[ \text{Lower elasticity} \Rightarrow \text{Higher monopoly power} \] So Assertion A is correct.

Step 2: Check Reason R.
Reason R says monopoly power is determined with more number of firms in the market. This is incorrect because more firms generally increase competition and reduce monopoly power. \[ \text{More firms} \Rightarrow \text{More competition} \Rightarrow \text{Less monopoly power} \]

Step 3: Choose the correct option.
Since Assertion A is correct but Reason R is incorrect, the correct answer is option (C).