CFA Practice Question
Refer to the graph below. Which rectangle represents monopolists' profit?
A. A
B. A + B + C
C. C + D
Explanation: Output is determined where marginal revenue equals marginal cost. Profit is determined by the rectangle created by the relevant price and average cost at that output.
User Contributed Comments 6
| User | Comment |
|---|---|
| Cata | :) to be cristal clear, you should add some colours for each rectangle! |
| labsbamb | doesn`t understand.SOmeone can explain this? |
| Nikita | If I am following the solution correctly shouldn't the profit be A + B? |
| adeelj | The answer is A, note that the monopolists earns profit by producing at a point where MR=MC and by charging price P on the demand curve. Hence the Monopolist earns an economic profit equal to (P-ATC)*Q, which means rectangle A. |
| JDM74 | Very tricky question. |
| kocas | always calculate firm profit using ATC*Q as total cost (revenue is P*Q as adeelj also said). Marginal profit on the other hand, is (MR-MC)*Q, which is aimed to be zero. |