ACCA Financial Management (F9) Certification Practice Exam

What is a monopoly?

1. A market structure with many firm producers

2. A market dominated by one sole producer

3. An economic strategy to control prices

4. A business model focusing on competition

The correct answer is: A market dominated by one sole producer

A monopoly is characterized as a market structure that is dominated by a single producer or seller who holds significant market power. This single entity has the ability to influence prices and dictate terms of sale due to the lack of competition. In such a scenario, the monopolist can maximize profits by setting prices above marginal costs, often leading to higher prices for consumers and potential inefficiencies in production. In markets where a monopoly exists, there are typically high barriers to entry that prevent other firms from entering the market, thus maintaining the monopolist's position. This could be due to various factors like significant startup costs, control of essential resources, or government regulation. The other options describe different market structures or strategies. For instance, a market with many producers would typically be more representative of perfect competition rather than monopoly. An economic strategy to control prices may be part of broader pricing tactics that firms employ, but it does not encapsulate the fundamental nature of a monopoly. A competitive business model, on the other hand, implies the presence of multiple firms striving for market share, which is contrary to the concept of monopoly. Thus, the correct understanding revolves around the dominance of a single producer in the market.