Chapter 61, Problem 2FRQ

a)

To determine

Graph showing a monopoly earning a normal profit in the short run.

Answer to Problem 2FRQ

AR = ATC which shows the normal profit.

Explanation of Solution

In the above diagram, the marginal cost curve is swoosh-shaped and cuts the marginal revenue curve at point E at which the monopolist charge price P which is equal to the average total cost, and AR=ATC which means the firm earns normal profit in the short run.

Economics Concept Introduction

Introduction:

  

A monopolist incurs a loss if the average total cost curve is above the profit-maximizing output level, and earns a normal profit when the average total cost equates average revenue or demand curve. And earn a super-normal profit when the average total cost is below the average revenue curve.

b)

To determine

Monopolists earn a positive profit in the long run.

Answer to Problem 2FRQ

Yes, a monopolist can earn positive profit in long run.

Explanation of Solution

Yes, a monopolist can earn positive profit in long run because of the barrier to entry. In long run, the monopolist is able to deter the new entrant by reducing the price for some time which makes it possible for a monopoly to charge a high price and earn positive profit.

Economics Concept Introduction

Introduction:

In the short run, monopolists can earn normal and positive profits. And in long run, a monopolist can earn positive profit. .