At the profit-maximizing level of output, how is a monopolist's profit represented on a graph?

• A. The area between the price and average total cost, multiplied by the profit-maximizing quantity
• B. The area between the demand curve and the marginal cost curve up to the equilibrium quantity
• C. The area between the marginal cost and marginal revenue curves up to the equilibrium quantity
• D. The area under the marginal revenue curve up to the equilibrium quantity

Answer: (A)

Verified step by step guidance

1. Understand that a monopolist maximizes profit where marginal revenue (MR) equals marginal cost (MC). This determines the profit-maximizing quantity, denoted as \(Q^*\).
2. Identify the price \(P^*\) the monopolist charges by looking at the demand curve at quantity \(Q^*\). This price is higher than marginal cost due to the downward-sloping demand curve.
3. Determine the average total cost (ATC) at quantity \(Q^*\) by finding the corresponding point on the ATC curve.
4. Calculate the per-unit profit by subtracting the average total cost from the price: \(P^* - ATC(Q^*)\).
5. Represent the total profit graphically as the rectangular area with height \(P^* - ATC(Q^*)\) and width \(Q^*\), which is the area between the price and average total cost curves multiplied by the profit-maximizing quantity.