Question

Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. Can this scenario be maintained in the long run?

Graphically depict the deadweight loss caused by a monopoly. Graph must be labeled appropriately to receive full credit.

Answer 1

Answer) In the first graph, industry is the price maker and firm is the price taker. Price and quantity is depicted qhere demand and supply intersects. At that price is above average cost and firm is earning profit shown by shaded region. As they are earning profits new firms will enter the market and supply curve shifts rightward to S1 and prices decreases and becomes equal to Average cost and in long run firm will earn normal profit.

In graph 2 of monopoly, profit maximising level of monopolist is where marginal revenue equals marginal cost i.e at output level of Q , MR and MC intersects and price is P2 which is charged by monopolist. And deadweight loss or loss in welfare is shown by shaded region.

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