Question

13.Graphically explain each of the following cases that

(1) a typical monopoly firm is making a positive economic profit

(2) a typical monopoly firm is making a zero economic profit

(3) a typical monopoly firm is making a negative economic profit

Answer 1

A monopolist maximizes profit (minimizes loss) by equating MR and MC. At the corresponding price, profit is positive, zero or negative if ATC is less than, equal to or greater than this price. In each graph, monopolist produces at point A where MR intersects MC with price P0 and quantity Q0.

(1) At Q0, ATC < P0, so there is a profit equal to area of rectangle P0BCD.

(2) At Q0, Price equals ATC and there is no profit, no loss.

(3) At Q0, ATC > P0, so there is a loss equal to area of rectangle P0BCD.