Question

Use the ATC, MC, MR, Demand Curves ONLY. Explain each graph.

1. Illustrate graphically a monopolist at a loss. (Label)

2. Illustrate graphically a monopolistic competition at a profit.

Answer 1

The above graph shows a monopolist incurring losses. A monopolist will produce that level of output where marginal cost is equal to marginal revenue (MC=MR). This is the profit maximising output. The price charged at this level of output is determined by the corresponding point on the demand curve.

In the above graph, MC=MR at point A. Hence, at output of Q units, MC=MR. The monopolist will produce an output of Q units. The price charged at this level of output is determined by the corresponding point on the demand curve. The price charged at output Q is P. We can see that at output of Q units, the demand curve lies below the average total cost curve (ATC). This means that the price charged at this level of output is less than average total cost. The price charged is P while average total cost is E which is more than the price.Hence, the firm is unable to cover it's costs and is incurring losses. Losses of the monopolist are equal to PMCE i.e., the shaded portion.

The above graph is of monopolistic competition earning profits. A monopolistically competitive firm will produce that level of output where marginal cost is equal to marginal revenue (MC=MR). This is the profit maximising output. The price charged at this level of output is determined by the corresponding point on the demand curve.

From the above graph, we can see that MC=MR at point B. Hence, at output of L units, MC=MR. This is the profit maximising output. The price charged at this level of output is determined by the corresponding point on the demand curve. The price charged at output of L units is P. From the above graph we can see that at profit maximising output L, the average total cost curve lies below the demand curve. It means that at output Q, the price charged is more than average total cost. The price charged is P while the average total cost is R which is less than the price. Hence, the firm is able to cover all it's costs and also generate a profit. Profits are equal to RCSP i.e., the shaded portion.