National Economics Challenge Practice Test

A monopolistic market is characterized by the presence of a single supplier that dominates the entire market. This means that one firm controls the production, supply, and pricing of a particular good or service, giving it significant market power. Because there are no close substitutes available, the monopolist can set prices above the competitive equilibrium, leading to higher profits compared to firms in more competitive markets.

In such a market, the monopolist can influence market conditions without facing competition, which can also result in inefficiencies such as reduced production levels and less innovation, since the incentive to improve products and services is diminished in the absence of rivals. Additionally, barriers to entry may exist, preventing other firms from entering the market to compete with the monopolist, thereby reinforcing its dominance.

The other descriptions do not accurately capture the essence of a monopolistic market: the first suggests a few sellers with many buyers, the second hints at competition with differentiated products, and the fourth implies openness to new entrants, which contradicts the defining characteristics of a monopoly.