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

(1) If a typical monopoly firm is making a positive economic profit, then P > ATC, the profit-maximizing quantity Q is at MR = MC, the price is set from the demand curve.

(2) If a typical monopoly firm is making a zero economic profit, then P = ATC, the profit-maximizing quantity Q is at MR = MC, the price is set from the demand curve.

(3) If a typical monopoly firm is making a negative economic profit, then P < ATC, everything else is the same.