Refer to Figure 15-4. On a monopoly graph, which area represents the monopolist's profit?

• A. The area between the price and average total cost, from quantity 0 to the monopolist's chosen quantity
• B. The area between price and marginal cost, from quantity 0 to the monopolist's chosen quantity
• C. The area between marginal revenue and marginal cost, from quantity 0 to the monopolist's chosen quantity
• D. The area between marginal cost and demand, from quantity 0 to the competitive equilibrium quantity

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the key components of a monopoly graph. Typically, it includes the demand curve (which is also the average revenue curve), the marginal revenue (MR) curve, the marginal cost (MC) curve, and the average total cost (ATC) curve.
2. Step 2: Identify the monopolist's chosen quantity, which is found where marginal revenue equals marginal cost, i.e., where \(\text{MR} = \text{MC}\). This determines the profit-maximizing output level.
3. Step 3: Determine the price the monopolist charges by going up vertically from the chosen quantity to the demand curve. This price is higher than marginal cost in a monopoly.
4. Step 4: Calculate the monopolist's average total cost at the chosen quantity by locating the ATC curve at that quantity.
5. Step 5: Recognize that the monopolist's profit is the difference between total revenue and total cost. Graphically, this is the rectangular area between the price and the average total cost curves, from quantity 0 to the monopolist's chosen quantity, i.e., \(\text{Profit} = (P - ATC) \times Q\).