Monopoly Profit on the Graph: Videos & Practice Problems

To determine the profit-maximizing quantity for a monopoly, identify where marginal revenue equals marginal cost. This intersection indicates the optimal production level. Profit or loss is calculated using the formula: $P^{-}\mathrm{ATC}Q$, where P is price from the demand curve and ATC is average total cost. A profit occurs when price exceeds average total cost, while a loss occurs when average total cost surpasses price, illustrating the impact of market structure on economic outcomes.

Monopoly Profit on the Graph

To determine the profit-maximizing quantity for a monopoly, the key principle is that this quantity occurs where marginal revenue (MR) equals marginal cost (MC). This concept is consistent across various market structures, including monopolistic competition. The intersection of the MR and MC curves on a graph indicates the optimal quantity to produce, which is crucial for maximizing profit or minimizing loss.

In a monopoly, the marginal revenue curve is distinct from the demand curve, which represents the price and average revenue. To find the profit-maximizing quantity, locate the point where the MR and MC curves intersect. From this intersection, drop down to the quantity axis to identify the specific quantity to produce.

Once the profit-maximizing quantity is established, calculating profit or loss involves comparing the price (derived from the demand curve) and the average total cost (ATC) at that quantity. The formula used is:

Profit = (Price - Average Total Cost) × Quantity

In a scenario where the average total cost is lower than the price, the area between the price and the average total cost on the graph represents profit. Conversely, if the average total cost exceeds the price, the area indicates a loss. This process mirrors the steps taken in perfect competition, although the curves and their relationships differ due to the nature of monopolistic pricing.

Understanding these concepts allows for effective analysis of monopolistic markets, where the ability to set prices above marginal cost can lead to significant profits or, in some cases, losses if costs are not managed effectively.

The MR curve lies below the demand curve in this figure because the:

• A. Demand curve is linear
• B. Demand curve is highly inelastic throughout its full length
• C. Demand curve is highly elastic throughout its full length
• D. Gain in revenue from an extra unit of output is less than the price charged for that unit

Answer: (D)

The economic profit can be found by multiplying the difference between P and ATC by quantity. It can also be found by:

• A. Dividing profit per unit by quantity
• B. Subtracting total cost from total revenue
• C. Multiplying the coefficient of demand elasticity by quantity
• D. Multiplying the difference between P and MC by quantity

Answer: (B)

This pure monopolist:

• A. Charges the highest price it could achieve
• B. Earns only a normal (accounting) profit in the long run
• C. Restricts output to create an insurmountable entry barrier
• D. Restricts output to increase its price and total economic profit

Answer: (D)

At this monopolist's profit-maximizing output:

• A. Price equals marginal revenue
• B. Price equals marginal cost
• C. Price exceeds marginal cost
• D. Profit per unit is maximized

Answer: (C)

Here’s what students ask on this topic:

How do you find the profit-maximizing quantity for a monopoly on a graph?

To find the profit-maximizing quantity for a monopoly on a graph, locate the point where the marginal revenue (MR) curve intersects the marginal cost (MC) curve. This intersection indicates the optimal production level. The quantity at this point is the profit-maximizing quantity. Remember, the MR curve is typically below the demand curve due to the downward-sloping nature of the demand in a monopoly. Once you identify this intersection, drop a vertical line down to the quantity axis to determine the exact quantity.

How do you calculate profit or loss for a monopoly using a graph?

To calculate profit or loss for a monopoly using a graph, first find the profit-maximizing quantity where MR equals MC. Then, determine the price (P) from the demand curve at this quantity. Next, find the average total cost (ATC) at this quantity from the ATC curve. Use the formula $P-\mathrm{ATC}Q$ to calculate profit or loss. If P > ATC, the firm makes a profit; if P < ATC, the firm incurs a loss. The area between the price and ATC curves at the profit-maximizing quantity represents the total profit or loss.

What is the significance of the marginal revenue curve in a monopoly?

The marginal revenue (MR) curve in a monopoly is significant because it helps determine the profit-maximizing quantity. Unlike in perfect competition, the MR curve in a monopoly lies below the demand curve due to the downward-sloping demand. This occurs because a monopoly must lower the price to sell additional units, causing MR to decrease faster than the price. The intersection of the MR curve with the marginal cost (MC) curve indicates the quantity at which the monopoly maximizes its profit or minimizes its loss.

Why is the demand curve also the price and average revenue curve in a monopoly?

In a monopoly, the demand curve represents the price (P) and average revenue (AR) because the monopolist is the sole seller in the market. The price at which the monopolist can sell each quantity is determined by the demand curve. Since the monopolist sets the price for each quantity sold, the demand curve directly shows the price consumers are willing to pay for each unit, making it the same as the average revenue curve. This relationship is crucial for calculating profit or loss.

How does a monopoly determine whether it is making a profit or a loss?

A monopoly determines whether it is making a profit or a loss by comparing the price (P) from the demand curve to the average total cost (ATC) at the profit-maximizing quantity. If P > ATC, the monopoly makes a profit. If P < ATC, the monopoly incurs a loss. This comparison is visualized on a graph where the area between the price and ATC curves at the profit-maximizing quantity represents the total profit or loss. The formula used is $P-\mathrm{ATC}Q$.