At an equilibrium level of output in a pure monopoly:
A) P = MC and P = minimum ATC.
B) P = MC and P > minimum ATC.
C) P > MC and P > minimum ATC.
D) P > MC and P = minimum ATC.
The correct answer and explanation is :
The correct answer is C) P > MC and P > minimum ATC.
Explanation:
In a pure monopoly, the market is controlled by a single firm that is the sole producer of a good or service. Unlike in perfect competition, where firms are price takers and produce at the point where Price (P) = Marginal Cost (MC), a monopolist has significant control over the market price due to the lack of competition. The monopolist maximizes profit by choosing the level of output where marginal revenue (MR) equals marginal cost (MC), but the price it charges is based on the demand curve, which is above the marginal cost.
Key Concepts:
- Price (P): The price that consumers pay for the good.
- Marginal Cost (MC): The cost of producing one additional unit of output.
- Average Total Cost (ATC): The per-unit cost of producing a given level of output, which includes both fixed and variable costs.
At the equilibrium level of output in a monopoly:
- The monopolist chooses the quantity where MR = MC. This is the point at which the monopolist maximizes profit because producing more or less would reduce profit.
- However, the price (P) is not equal to MC because the monopolist faces a downward-sloping demand curve. To sell more units, the monopolist must lower the price, which means that the price is always higher than the marginal cost at the optimal output level.
- In a monopolistic market, the monopolist’s Price (P) is generally above the minimum ATC. This happens because monopolists have the ability to restrict output to raise prices, resulting in profits in the long run, unlike firms in perfect competition which produce at the minimum point of the ATC curve.
Thus, in a monopolistic equilibrium, P > MC and P > minimum ATC because the monopolist charges a price higher than both marginal cost and the minimum average total cost, making option C the correct answer.