Answer to Question #97287 in Microeconomics for ABU

Question

Using a well-illustrated diagram, show that a monopolist can make losses in the short-run even when MC = MR

Answer 1

A monopoly business is one that has the absolute right to produce a particular product or service. The company manufactures a unique product that is not a close substitute. Thus, the company does not face any competition from other companies. This gives the company the opportunity to set a price for its products and to control the supply of the market for its production.

figure 01

Monopoly companies maximize profits by producing their marginal revenue at a level equal to their marginal cost. That is, $MR = MC$ .

At $MR = MC$, the optimal price charged by the company rises to the demand curve.

From the above figure, the price charged by the company for maximizing profit or minimizing losses is equal to "$B$" and the quantity produced by the company is equal to $Q_1$ units.

When maximizing profits, the average total cost of a company is equal to $ATC = A$ . Firm total loss is $ACDF$