Question

Explain with a diagram how despite being a price maker, a monopolist can make a loss in the short run.(5marks) Answer Asap

Answer 1

The Monopoly sets its Quantity in the short run by setting MR = MC.

This point decides the profit maximizing quantity. In the given diagram, this point is named Q*.

The equilibrium Quantity is Qe.

At the profit maximizing quantity Q*, the prevailing ATC is denoted by P".

As can be seen, P" is greater than P*.

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In other words, the profit maximizing price is unable to cover the ATC prevailing at that price. This leads to a situation of loss.

This occurs when P < ATC.

If the firm can bring down its ATC, it may be able to make profits.

Note: The formula for a monopoly firm's profits is: (P - ATC) x Q

Thus, even though the firm is a price maker, it may still make losses if the costs of production are very high.