CFA Practice Question
For a monopoly earning economic losses, the demand curve ______
A. is below the average total cost curve at every level of output.
B. is tangent to the average total cost curve at every level of output.
C. Neither of the above are correct because a monopoly firm cannot incur economic losses.
Explanation: When the demand curve is below the average total cost curve at every output level there is no quantity that can be sold at a sufficiently high price to cover all of the costs of producing. The firm would incur economic losses. Given the negative-sloped demand curve and u-shaped cost curve, it is impossible for the demand curve to be above or tangent to the average total cost curve at every level of output.
User Contributed Comments 2
| User | Comment |
|---|---|
| tiptop | A is wrong. If ATC is below the demand curve, a monopoly is earning profit. B is right. |
| scprior | A says demand curve is below ATC, read the answer twice before posting and saying its wrong. And yes, if your post was correct and ATC was below the demand curve, then there would be economic profit. thanks |