Under monopoly, a firm:
A) is a price taker.
B) maximizes profit by setting marginal cost equal to marginal revenue.
C) will shut down in the short-run if price falls short of average total cost.
D) always earns a pure economic profit.

Question

Quizplus · Accepted Answer

Under monopoly, a firm has market power and is able to set its own price. The profit-maximizing output level occurs where marginal cost equals marginal revenue, which is not the same as marginal cost equaling price like in perfect competition. Option A is incorrect because a monopolist is a price setter, not a price taker. Option C is only partially correct because the firm will only shut down if price falls below average variable cost, not average total cost. Option D is incorrect because a monopolist may earn an economic profit, but not necessarily a pure economic profit (i.e., profit above opportunity cost).

Under Monopoly, a Firm