Question

i). Draw a graph and explain the situation where

a). A monopolist earns “zero economic rent”.

b). A monopolist minimizes production costs.

Answer 1

a)Zero economic rent would imply that the payment to an owner of a factor of production is equal to the cost needed to use that factor of production in the first place. That is to say, that there are no "economic profits" or "supernormal profits" that the monopolist is earning. The cost is equal to the return on the factor. In such a case, in the long run, the monopolist earns zero economic profits or rent. It has zero economic rent where P=ATC It can be shown diagramatically as follows-

Therefore, the quantity Q* is where there are zero economic profits.

b) What is perhaps really important to understand is that cost minimisation does not imple profit maximisation. Cost is minimised where Average Total Cost(ATC) is equal to the Marginal Cost(MC) i.e. ATC=MC. Cost minimisation and profit maximisation can occur at different quantities too. Profit maximisation for a monopolist always occurs where Marginal Revenue=Marginal Cost, i.e. MR=MC.

Therefore, the cost minimising quantity would be Q* where ATC=MC, and the profit maximising quantity would be where MR=MC, i.e. Qm.