Chapter 61, Problem 1FRQ

To determine

Graph showing monopoly incurring a loss in the short run and comparing quantity effect and price effect.

Explanation of Solution

  

In the MC is the marginal cost curve which is swoosh-shaped, the average total cost curve is above the profit-maximizing output level which shows the firm incurring a loss.

MR=MC is the profit-maximizing condition in a monopoly market. When price decreases, then quantity increases in such a manner that marginal revenue increase due to an increase in quantity is positive and larger than marginal revenue decrease due to a price decrease. At profit-maximizing quantity, the quantity effect is positive and larger than the negative price effect but the overall effect is positive.

Economics Concept Introduction

Introduction:

In a monopoly market, monopolist profit ger maximized at the point where marginal cost equates to marginal revenue. In case of incurring a loss, the average total cost curve is above the profit-maximizing output, and MC cuts at its minimum point.