A flour mill holding exclusive contracts to 95% of the wheat in a large geographic area may operate as a flour-producing monopoly locally because
A) the mill has a very inelastic supply curve.
B) the mill is a natural monopoly.
C) the mill controls a key input.
D) the government will declare it a monopoly.

Question

Quizplus · Accepted Answer

The flour mill holding exclusive contracts to 95% of the wheat in a large geographic area can operate as a flour-producing monopoly locally because it controls a key input, i.e., the wheat. It can then dictate the terms and conditions of the supply of wheat to other firms, making it difficult for them to compete. This gives the flour mill market power to set prices and restrict output, resulting in higher prices and lower output than would exist in a competitive market.

A Flour Mill Holding Exclusive Contracts to 95% of the Wheat