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Suppose that a profit-maximizing, patent-protected monopolist finds that its price lies between its AVC and ATC...

Suppose that a profit-maximizing, patent-protected monopolist finds that its price lies between its AVC and ATC in the short run. What action would you recommend to this firm?

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Answer #1

We know that for any particular market structure the marginal cost cut the average variable cost and average total cost at their minimum levels. If the price faced by a monopolist lies between the average variable cost and average total cost it indicates that price is greater than the minimum of average variable cost but it is less than the minimum of average total cost. Therefore the monopolist is earning losses but it is able to cover its variable cost. In the short run it can continue to operate because its accounting profit are greater than zero.

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