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# A monopoly exists when a specific person or enterprise is the only

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BSchool Forum Moderator
Joined: 29 Jan 2015
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Location: India
WE: General Management (Consumer Products)
A monopoly exists when a specific person or enterprise is the only  [#permalink]

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Updated on: 29 Nov 2018, 17:50
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A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity (this contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with an oligopoly which consists of a few entities dominating an industry). Monopolies are thus characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods. The verb "monopolize" refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge high prices. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.

A monopoly is distinguished from a monopsony, in which there is only one buyer of a product or service; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations such that one or a few of the entities have market power and therefore interact with their customers (monopoly), suppliers (monopsony) and the other companies (oligopoly) in ways that leave market interactions distorted.

Monopolies can be established by a government, form naturally, or form by integration. In many jurisdictions, competition laws restrict monopolies. Holding a dominant position or a monopoly of a market is often not illegal in itself. However certain categories of behavior can be considered abusive and therefore incur legal sanctions when a business is dominant. A government-granted monopoly or legal monopoly, by contrast, is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic interest group. Patents, copyright, and trademarks are sometimes used as examples of government granted monopolies. The government may also reserve the venture for itself, thus forming a government monopoly.

1- What is the primary purpose of the second paragraph in the passage:

A- To highlight the differences between monopolies and monopsonies and oligopolies.
B- To suggest that monopolies, monopsonies, and oligopolies are very similar.
C- To note some distinctions between and shared characteristics of monopolies and several other similar economic constructs.
D- To help the reader understand when monopolies are illegal and when they are not.
E- To explain what a monopoly is and what distinguishes it from other businesses.

2- According to the passage, which of the following situations would most likely constitute a monopsony, but NOT a monopoly (as defined in the legal sense)?

A- A large computer manufacturing company in this country has several major competitors, but only uses one supplier for its chips and other hardware components.
B- The largest discount department chain in this country has the lowest retail prices in the market, but makes a profit by controlling the suppliers and dictating the prices it pays for the goods it sells.
C- The three largest grocery store chains control the market and collude to keep prices high, but struggle to keep their purchase price for foodstuffs low.
D- The largest airline in the country merges with the second largest airline, allowing it to control a majority of domestic routes and charge higher prices for its flights; simultaneously, it is able to control the purchase prices of planes from the two major aircraft manufacturers.
E- The largest orange juice manufacturer in the country has a complete control on retail prices and has driven up prices by 50% in the past two years; it has simultaneously controlled orange growers and pushed down the prices it pays by over 25% in the same time period.

3- Which of the following can be properly inferred from the passage above?

A- Monopolies that develop through a patent or trademark are rarely illegal.
B- A monopoly could never also be considered a monopsony.
C- Most monopolies are considered illegal and incur government sanctions.
D- A business that is considered a monopoly in an economic sense might not be considered one in a legal sense.
E- A monopoly is distinguished from an oligopoly (or cartel) by the degree of influence over the market.

Originally posted by rohan2345 on 29 Nov 2018, 09:04.
Last edited by workout on 29 Nov 2018, 17:50, edited 1 time in total.
Senior Manager
Joined: 27 Dec 2016
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Re: A monopoly exists when a specific person or enterprise is the only  [#permalink]

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29 Nov 2018, 18:22
8 mins. All correct. Let me know if anyone has any questions! Would love to help!
Intern
Joined: 18 May 2015
Posts: 10
GMAT 1: 580 Q47 V23
Re: A monopoly exists when a specific person or enterprise is the only  [#permalink]

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29 Nov 2018, 20:18
Can Anyone please explain question no 2?

Intern
Joined: 03 May 2012
Posts: 8
Re: A monopoly exists when a specific person or enterprise is the only  [#permalink]

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29 Nov 2018, 20:31
csaluja wrote:
8 mins. All correct. Let me know if anyone has any questions! Would love to help!

Retired Moderator
Joined: 23 Sep 2015
Posts: 1711
Re: A monopoly exists when a specific person or enterprise is the only  [#permalink]

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30 Nov 2018, 19:14
2
P1 - intro monopoly , its characteristics.
P2 - distinguish it with monopsony and other.
P3 - legal aspect of situation.

1- What is the primary purpose of the second paragraph in the passage:

A- To highlight the differences between monopolies and monopsonies and oligopolies. ------ this is not the only thing.
B- To suggest that monopolies, monopsonies, and oligopolies are very similar. -------- differences are there.
C- To note some distinctions between and shared characteristics of monopolies and several other similar economic constructs. ---- this is one we are looking for . both similar and differences are there.
D- To help the reader understand when monopolies are illegal and when they are not. ---- no
E- To explain what a monopoly is and what distinguishes it from other businesses. ----- no

-------------------------------------------------

2- According to the passage, which of the following situations would most likely constitute a monopsony, but NOT a monopoly (as defined in the legal sense)?

a monopsony, in which there is only one buyer of a product or service;
Not Monopoly should also be defined.

A- A large computer manufacturing company in this country has several major competitors, but only uses one supplier for its chips and other hardware components. ----- many buys ..... not a monopsony

B- The largest discount department chain in this country has the lowest retail prices in the market, but makes a profit by controlling the suppliers and dictating the prices it pays for the goods it sells. ----- it is monopsony cause discount stores have buys in for of general public. apart from this no one buys from them. there are always many such stores (lowest retail prices indicates atleast 2.) So it is not monopoly. - answer.

C- The three largest grocery store chains control the market and collude to keep prices high, but struggle to keep their purchase price for foodstuffs low. ---- not monopoly, this should be monopsony too.

D- The largest airline in the country merges with the second largest airline, allowing it to control a majority of domestic routes and charge higher prices for its flights; simultaneously, it is able to control the purchase prices of planes from the two major aircraft manufacturers. ---- not an answer.

E- The largest orange juice manufacturer in the country has a complete control on retail prices and has driven up prices by 50% in the past two years; it has simultaneously controlled orange growers and pushed down the prices it pays by over 25% in the same time period - no

rohan2345 - B and C both are on same lines it seems. How B is better in this case. Can you help me by sharing OE. Thanks mate !
-----------------------------------------------

3- Which of the following can be properly inferred from the passage above?

D- A business that is considered a monopoly in an economic sense might not be considered one in a legal sense.
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Re: A monopoly exists when a specific person or enterprise is the only  [#permalink]

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01 Dec 2018, 00:44
2
Here are the official Explanations of all the questions.

1- This question should be treated much like a normal primary purpose question. (A) is a difficult incorrect answer choice. While the paragraph does point out several differences of the three market structures, the whole second part of the paragraph focuses on similarities among the three structures (how they all distort market interactions). As a result, (A) does not properly capture the purpose of the paragraph. (B) does the opposite – it focuses on the similarities without noting the importance of the distinctions in the paragraph. (C) describes it perfectly – the paragraph is there to highlight some distinctions and shared characteristics. For (D), the explanation of when monopolies are illegal is found in the other two paragraphs, but not in this one. For (E), this paragraph is not used to introduce what a monopoly is, and the paragraph is only used to distinguish it from two other constructs, not “other businesses.” Correct answer is (C).

2- To get this problem correct, you must first understand the difference between the two terms from the passage. In a monopoly, a company controls most of its market, and in a monopsony, a company controls its supplier market. The correct answer will be one that describes a monopsony, but NOT a monopoly. In (A), you have a situation that is unlikely to be a monopoly, but you have no idea if it is a monopsony. Just because a company has only one supplier, that does not mean the company has control over that supply market and represents a monopsony. In (B), you have the exact situation required. The situation is clearly not a monopoly because the retail prices are so low (in a monopoly the company has control of the market and takes advantage with pricing), but the company has a stranglehold on the supplier’s market, constituting a monopsony. In (C) the situation is not a monopoly (it is an oligopoly), but a monopsony also does not exist. In both (D) and (E), you have both a monopoly and a monopsony, so that does not meet the conditions in the question. Answer is (B).

3- For (A), you learn in the passage that “Patents, copyright, and trademarks are sometimes used as examples of government granted monopolies.” Those government granted monopolies would indeed be legal. However, that does not exclude the possibility that MANY other monopolies developed through patents and trademarks are illegal, so (A) is not inferable. (B) is directly contradicted in the passage as you learn in the second paragraph that they may exist together. For (C) you know that some monopolies can be illegal but you have no idea whether “most” are and how many incur government sanctions. In the first paragraph you learn that there is a difference in definition between a monopoly in an economic sense (single seller) and a monopoly in a legal sense (one with market power and the ability to control prices). Therefore (D) must be true based upon that difference in definition. For (E), the difference in definition between the two (monopoly and oligopoly) relates to whether multiple companies control the market together and does not relate to the degree of influence over the market. Answer is (D).

Hope this helps. All the best!
Re: A monopoly exists when a specific person or enterprise is the only   [#permalink] 01 Dec 2018, 00:44
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