Question

A benefit of monopoly for the business owner is government funding. incentive for quality. consumer choice. ability to set prices.

Answer 1

I assume this is a multiple choice with:
a) government funding
b) incentive for quality
c) consumer choice
d) ability to set prices

The correct answer is (d). A monopolist by definition means that a singular business controls the supply for the entire market. It has no competition since it is the only business that exists in the economy selling that particular good. Also, this particular good it is selling has no near substitutes and is unique and desired by consumers. What I mean by this is that if the company was selling Cola, it could not be considered a monpolist because consumers could just switch over to buying Pepsi.

Returning to the answer, a monopolist's greatest advantage is the ability to set prices. This can only occur because it has no competition and can arbitrarily choose to sell at whatever price it wants to. Consumers have no choice but to buy at whatever price the monopolist asks. Let's say the monopolist was the only seller of food and asked for a very high price, high enough that some people wouldn't be able to afford it. It would not matter to the monopolist because it will still find willing consumers to pay the high price and as a result, it is in the monpolist's interest to set a high a price as possible with certain constraints.

What I mean by constraints is that it would be illogical for the monpolist to set a price so high that nobody could afford it. Let's assume a market has 100 consumers, of various wealth - 20 rich people, 50 middle class people, and a 30 low income people. Let's also assume each consumer can only buy 1 good and the monpolist only produces 50 goods in total. If the monpolist sells to only 1 person, they will have an inventory of 49 left over and will not be able to cover their costs. Instead, the monpolist will lower the price such that it will be able to sell up to 50 people.

Here's a quick example. The monpolist is Apple and they have 50 iPhone 5's to sell but there are 100 consumers who want to buy them. The monopolist will set a price of say $600. The first 20 that will buy it will be the 20 rich people since they can all afford the price. The remaining 30 iPhones will be purchased by 30 out of the 50 middle class people who can afford it. The 31st middle class person can only afford to pay $580 while the 30th middle class person (who bought the last iPhone) could afford to pay up to $620.

As you can see, without a free market due to a monopolist, they can set prices and sell only to the more privelged or economically able people. If the monopolist tried to produce enough for every person, they would lose money because let's say the low income people could only afford to pay $300. The middle class people may have been willing to pay up to $650, but now they only have to pay $300 and can save $350. That $350 is money that won't go to the monopolist. This is what occurs when competitors enter the market and increase supply and thereby lowering price.