Question

a. Draw a diagram illustrating the profit maximizing output for the monopolist with abnormal profit. The
diagram should contain short-run average cost, average variable cost, short-run marginal cost, and marginal
revenue curves and shade area that represents abnormal profit. Make your diagram large and label all curves,
axes, and points.

b. Why, in the case of a monopolist, is marginal revenue at any output less than output price?

c. Why doesn't the abnormal profit of a monopolist, unlike that of the perfect competitor, reduce to zero in
the long run?

Answer 1

A.

Monopolist market Price The Shaded area - Abnormal Profit MC ATC AVC MR Quantity

B.

Marginal revenue is diminishing in nature, but output price at that level of output is above the MR curve. It makes MR to be lower than the output price.

C.

Monopolist is the single producer in the market, with no substitutes and entry barriers. So, in long term also, no any other firm can enter the market and rival the monopolist. So, the abnormal profit level remain in long run as well.