Question

Which of the following formulas correctly measures the profit of a monopoly? • π = TR - TC • π = (P - ATC)Q • π = (P - AVC)Q • π = TR - TC and π = (P - ATC)Q

Answer 1

A monopoly firm first equates MR and MC, to find the optimal quantity to produce.

At this quantity, the monopoly analyzes the demand curve, to find the maximum willingness to pay of the consumers.

It thus selects a price which is on the demand curve, and corresponds to the quantity found by MR = MC.

At this quantity, the prevailing ATC is relevant to note. This is because if the Price is above ATC, the monopoly makes a profit. If the price is below ATC, the monopoly makes a loss.

It is important for the monopoly to keep costs down, and also at MR = MC, ATC should be kept low.

So while TR minus TC is the general formula for firms' profits, the correct choice in this case is:

Answer:

π = (P - ATC)Q