Answer to Question #202615 in Microeconomics for aisha

Question

With the aid of a clearly labeled diagram, illustrate the difference between; i.A competitive firm making abnormal profits and subnormal profits (10 marks) ii.A monopolist making normal profits and supernormal profits (10 Marks) iii.What are the conditions for profit maximization? (5marks) 

Answer 1

i

abnormal/ supernormal profit

Firms make abnormal profits when then MR is greater than MC and marginal profit is still greater than zero.

subnormal profits

If the firm produces at a point where MC is greater than MR and marginal profit is negative, the firm makes subnormal profits. Hence, the firm should reduce its output.

ii

normal profits in monopoly

A monopoly will make normal profits at a point where where marginal revenue is equal to marginal cost: that is, MR = MC.

Supernormal profit in monopoly

A monopoly is able to maintain super-normal profits in the long run. This is because, the level of profit depends upon the degree of competition in the market, which for a pure monopoly is zero.

iii

Firms generate maximum profits when marginal revenue (MR) is equal to marginal cost (MC). At this point, the cost of producing one extra unit of a good is equal to the revenue derived from selling one extra unit.