Refer to Figure 15-7. A profit-maximizing monopolist would earn profits equal to:

• A. the area between marginal cost and marginal revenue, from quantity 0 to the profit-maximizing quantity
• B. the area under the demand curve up to the profit-maximizing quantity
• C. the area between price and average total cost, from quantity 0 to the profit-maximizing quantity
• D. zero, since monopolists cannot earn economic profits in the long run

Answer: (C)

Verified step by step guidance

1. Understand that a profit-maximizing monopolist chooses the quantity where marginal revenue (MR) equals marginal cost (MC). This is the fundamental rule for profit maximization in monopoly.
2. Identify the profit-maximizing quantity (Q*) on the graph where the MR curve intersects the MC curve.
3. Determine the price (P*) the monopolist charges by going up vertically from Q* to the demand curve. This price is what consumers are willing to pay for that quantity.
4. Find the average total cost (ATC) at the profit-maximizing quantity by locating the ATC curve at Q*.
5. Calculate the monopolist's profit as the area of the rectangle formed by the difference between price and average total cost, multiplied by the quantity: Profit = (P* - ATC at Q*) \times Q*. This area represents total economic profit.