Question

Describe with the help of a diagram the super normal profit earned by a monopoly firm in equalibrium in short run.

Answer 1

If a monopolist sets a price above the average cost (AC), they will earn supernormal profits. The monopolist will produce up to the point where marginal cost (MC) equals marginal revenue (MR). This point represents the equilibrium output.

In the above Figure, the X-axis measures output, and the Y-axis represents price. The short-run average cost (SAC) and short-run marginal cost (SMC) curves are depicted alongside the average revenue (AR) and marginal revenue (MR) curves. The monopolist reaches equilibrium at point E, where both equilibrium conditions are satisfied: MR equals MC, and MC intersects the MR curve from below. At this level of equilibrium, the monopolist will produce output OQ1 and sell it at a price of CQ1, which is higher than the average cost DQ1 by CD per unit. Thus, the total profit of the monopolist in this case is represented by the shaded area ABCD.