If a pure monopolist is producing at that output where P= ATC, then:
a. its economic profits will be zero.
b. it will be realizing losses.
c. it will be producing less than the profit-maximizing level of output.
d. it will be realizing an economic profit.
The correct answer and explanation is :
The correct answer is:
a. its economic profits will be zero.
Explanation:
In microeconomics, a pure monopolist is a firm that is the sole producer of a good or service in a particular market. The monopolist has significant control over the price and the quantity of output produced because there are no close substitutes for the product it offers.
Economic profit is calculated as the difference between total revenue (TR) and total cost (TC), specifically the difference between total revenue and total cost including both fixed and variable costs, with the opportunity costs of all resources employed.
When a monopolist is producing at an output where the price (P) equals average total cost (ATC), this means that the firm is covering all of its costs, including normal profit (which is the minimum amount needed to keep the firm in business). In other words, the firm’s total revenue (TR) is equal to its total cost (TC), and therefore, the monopolist earns zero economic profit. This condition corresponds to the point where the firm is not making any profit above what is necessary to remain in the market.
In this situation, the monopolist is not making an economic profit but also not incurring a loss. Here’s why:
- Economic Profit = Total Revenue – Total Cost (including opportunity cost)
- If P = ATC, then Total Revenue = Total Cost, and hence Economic Profit = 0.
This condition occurs in the long run for a monopolist when there are no barriers to entry (i.e., when the firm faces potential competition that could erode its monopoly power), or when the monopolist is at a point of long-run equilibrium where it is earning just enough to cover all its costs. In this case, it is not producing a profit above the cost of capital but is still able to remain operational without incurring losses.
Why the other options are incorrect:
- b. it will be realizing losses: This would be the case if P < ATC, meaning the firm’s total revenue is less than its total costs.
- c. it will be producing less than the profit-maximizing level of output: The profit-maximizing level of output occurs where marginal cost (MC) equals marginal revenue (MR), not where P = ATC.
- d. it will be realizing an economic profit: Economic profit occurs when P > ATC, but here P = ATC, meaning zero economic profit.