The figure below shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. At the socially optimal level of output, this monopolist would:

Question

The figure below shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist.  At the socially optimal level of output, this monopolist would:

Quizplus · Accepted Answer

The socially optimal level of output is where the marginal cost (MC) equals the marginal revenue (MR) and the price is equal to the demand. From the graph, we can see that this occurs at a quantity of 4 units, where the price is $8. At this level of output, the average total cost (ATC) is $12, which means that the monopolist incurs an economic loss of ($8-$12) x 4 = $-16. However, since the monopolist is not producing at the quantity where the demand intersects with the average total cost curve (where there is zero economic profit), it is not earning any economic profit.

The Figure Below Shows the Demand Curve, Marginal Revenue Curve