Question

Use the following diagram to answer the next question.

(10.0K)

Refer to the diagram. Assuming entry into this industry is blocked, the firm represented in the diagram:

A can use its monopoly power to earn an economic profit

B will be unable to earn economic profits at any possible price

C is earning a normal profit

D is earning a normal profit but not an economic profit

Answer 1

It shall be noted that the diagram is:

It shall be noted that entry into the industry is blocked. Hence, the situation is that of a monopoly.

For a monopoly, the profit-maximizing quantity is given by equilibrium condition MR = MC

The equilibrium price follows from the downward sloping demand curve D.

In the present situation as reflected in the diagram, the average total cost (ATC) is lower than the equilibrium price.

Hence, the firm earns an economic profit.

Hence, the correct answer is A. can use its monopoly power to earn an economic profit.