Question

a. Draw a diagram illustrating the profit maximizing output for the monopolist with abnormal profit. The diagram s hould contain short-run average cost, average variable cost, short-run marginal cost, and marginal rves and shade area that represents abnormal profit. Make your diagram large and label all curves, axes, and points. (10 points) b. Why, in the case of a monopolist, is marginal revenue at any output less than output price? (10 points) c. Why doesn't the abnormal profit of a monopolist, unlike that of the perfect competitor, reduce to zero in the long run? (10 points)

Answer 1

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a). The profit maximizing output is where the marginal cost is equals the marginal revenue of the firm.

b). The marginal revenue is less than the price in the monopoly this is because of the monopolist has to charge less if he want to sell more. The demand curve is downward sloping in the monopoly and this shows negative relationship between the price and the quantity demanded, if the seller want to increase the sales he must lower the price so the marginal revenue is less than the price.

c). In the monopoly there are barriers to entry in the short run as well as the long run so the new entrants will not come and this will assure the positive economic profits even in the long run. In the perfect competition there is freedom of entry and exit so the new firms will come to the market in the long run and the profits will be zero in the long run.

PROFIT Price MC ATC AVC MR Quantity