If the monopolist charges price P* for output Q* in order to maximize profit or minimize loss in the short run, it should
A. continue to produce because a monopolist always earns a profit.
B. continue to produce because the price is greater than the average variable cost.
C. shut down because the price is greater than marginal cost.
D. shut down because the price is less than the average total cost.
A monopoly is a market structure characterized by a single seller and a large number of buyers in the market, such that the single seller caters to the entire market demand. This is also the reason why monopolists do not have a supply curve. There is a high market restriction in monopoly, which results in the availability of no close substitutes in the market.
Answer and Explanation: 1
B. Continue to produce because the price is greater than the average variable cost.
Reason: The shut down point in a monopoly occurs at the point when the monopolist is not even able to earn a revenue equivalent to its average variable cost. Until the point the monopolist cannot cover its average variable cost, it will continue its production. In this case, we see that even when the monopolist is minimizing its level of loss by producing Q* level of output and at price P*, it is still incurring a loss equivalent to the difference between the AR (demand curve) and AC curves. Even then, the firm is able to generate revenue higher than its AVC, as AR is greater than AVC at the level of output. Hence, the firm will continue to produce.
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fromChapter 7 / Lesson 2
Understand the meaning of a monopoly in economics and what it does. Also, know the characteristics of a monopoly and the different types of monopolies.