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The diagram below shows a firm operating under conditions of Monopoly - Leaving Cert Economics - Question 6 - 2017
Question 6
The diagram below shows a firm operating under conditions of Monopoly. (a) Label the lines/curves in the diagram and (b) Use the diagram to explain the long run equ... show full transcript
Worked Solution & Example Answer:The diagram below shows a firm operating under conditions of Monopoly - Leaving Cert Economics - Question 6 - 2017
Step 1
Label the lines/curves in the diagram
Answer
In the diagram:
- MR represents the Marginal Revenue curve.
- MC represents the Marginal Cost curve.
- AC represents the Average Cost curve.
- AR represents the Average Revenue curve, which corresponds to the demand curve.
- The area designated as SNP indicates Supernormal Profits.
The equilibrium point is where the MC curve intersects the MR curve.
Step 2
Use the diagram to explain the long run equilibrium position for a firm in Monopoly
Answer
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Equilibrium Point: The firm reaches equilibrium where Marginal Cost (MC) equals Marginal Revenue (MR). At this point, profit maximization occurs since additional units would not contribute positively to profit.
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Output and Pricing: The firm produces output level and sells it at price , as determined by the demand curve (AR). This price is higher than the average cost (AC) at quantity , allowing the firm to earn supernormal profits (SNP).
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Cost Representation: Costs are illustrated at level , reflecting the average cost of production at the output level. The firm is not producing at the lowest point on the AC curve, indicating inefficiency.
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Barriers to Entry: Supernormal profits are sustained due to barriers to entry in the market, which prevents new firms from entering and competing away the profits.