(a) The pro t-maximizing output level for a perfectly competitive
rm is where marginal cost (MC) equals marginal revenue (MR). On
the graph, this is the point where the MC curve intersects the MR
(which is also AR and price) curve. The rm determines its pro t-
maximizing output by producing up to the point where the cost of
producing one more unit (MC) equals the revenue gained from
selling that unit (MR).
(b) To determine if the rm is earning abnormal pro t, normal pro t,
or making a loss, compare the average total cost (ATC) at the
equilibrium output to the price (MR). If the price is above the ATC at
the pro t-maximizing output, the rm earns abnormal
(supernormal) pro t. If the price equals ATC, the rm earns normal
pro t. If the price is below ATC, the rm is making a loss. From the
graph, if the price (MR) is above the ATC at the equilibrium output,
the rm is earning abnormal pro t.
(a) The pro t-maximizing output for a monopolist is determined where
marginal cost (MC) equals marginal revenue (MR). On the graph, this is
the point where the MC and MR curves intersect. The monopolist then
charges the highest price consumers are willing to pay for that output level,
found by going up vertically from the pro t-maximizing quantity to the
demand (D) curve.
(b) Barriers to entry, such as high startup costs, legal protections, or
control of essential resources, prevent new rms from entering the market.
These barriers allow the monopolist to maintain its market power and
continue earning abnormal (supernormal) pro ts in the long run because
potential competitors cannot enter the market to drive economic pro ts
down to zero.
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