Question

Do monopoly firms always make profit and when should a monopoly firm shut down ?

Answer 1

(a)

In a perfectly competitive market, price equals marginal cost and firms earn an economic profit of zero. In a monopoly, the price is set above marginal cost and the firm earns a positive economic profit.

(b) A monopolist should shut down when price (average revenue) is less than average variable cost for every output level; in other words, it should shut down if the demand curve is entirely below the average variable cost curve.