Do all monopolists earn profits? why or why not?

Expert Solution

A monopoly is a firm with sufficient market power that it can raise the price of the good above marginal cost and enjoys super normal profit; without fearing that other firm will enter into the market. To maximize profit a firm should produce until marginal revenue equals marginal cost. Thus, the equilibrium quantity is determined from the point of interaction between marginal revenue and marginal cost curve. The equilibrium price is determined from the demand curve; the monopolist set that price which consumers are willing to pay for equilibrium quantity.

Thus, the monopolist charges a price which is greater than the marginal and average cost curve. The monopolists have power to influence the market price, thus the price charged by the firm will drive the market price high. As the monopolists charges a price higher than the marginal cost as well as average cost to earn supernormal price, the setting of price is higher than the average cost will make the optimal decision of monopolist unchanged.

Hence, each monopolist earn profits unless regulated. If the firm does not earn profit, it will not be monopoly anymore.

Rahul Sunny answered 2 years ago

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