Question

Draw a price-setting firm earning zero economic profits. Identify and briefly explain the output

            level and the price level. Label and note the four corners of the areas of revenue, costs, and

            profit. Why is this an ‘equilibrium’? When would one expect this result?

Answer 1

Since the price setting firm is monopoly firm and a monopolist firm earn zero profit in the long-run only. This is because in the long-run the profit-maximising condition is

MR=MC

But in the long-run this condition becomes

P=ATC

Hence the profit maximising price is Pm and quantity is Qm.

Since the total cost and total revenue are same. So the area of total cost and total revenue are same. This has been shown by the blue shaded rectangle.

The profit=(P-ATC)Q

Since P and ATC are same. Hence the profit will be zero.

This is an equilibrium because the profit-maximising condition has been satisfied.

This condition happens only in the long-run.