At the level of output where the marginal cost and marginal revenue curves intersect, a monopolist's demand curve passes above its average total cost curve. The firm will:
A) be able to make a positive economic profit.
B) stay in operation in the short run, but then shut down.
C) shut down in the short run.
D) increase its price.

Question

Quizplus · Accepted Answer

At the level of output where the marginal cost and marginal revenue curves intersect, the monopolist produces and sells the quantity that maximizes its profit. Since the demand curve passes above the average total cost curve at this level of output, the price exceeds the average cost, which means the firm is earning a positive economic profit. Therefore, the best choice is A, which states that the firm will be able to make a positive economic profit. Choices B and C are incorrect because they suggest that the firm may shut down, which is not necessarily the case when the profit is positive. Choice D is incorrect because the monopolist has no incentive to increase the price at the profit-maximizing level of output, as this would reduce its revenue and profit.

At the Level of Output Where the Marginal Cost and Marginal