Multiple Choice
At this monopolist's profit-maximizing output:
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12. Monopoly
Monopoly Profit on the Graph
Multiple Choice
Which of the following equations calculates economic profits for a monopoly?
A
Economic Profit = P \(\times\) Q - AVC \(\times\) Q
B
Economic Profit = (MC - MR) \(\times\) Q
C
Economic Profit = (P - ATC) \(\times\) Q
D
Economic Profit = (TR - TC) \(\div\) Q
Verified step by step guidance1
Step 1: Understand the definition of economic profit. Economic profit is the difference between total revenue (TR) and total cost (TC), where total cost includes both explicit and implicit costs.
Step 2: Recall the formulas for total revenue and total cost. Total revenue is calculated as \(TR = P \times Q\), where \(P\) is price and \(Q\) is quantity. Total cost is \(TC = ATC \times Q\), where \(ATC\) is average total cost.
Step 3: Write the economic profit formula using total revenue and total cost: \(Economic\ Profit = TR - TC\).
Step 4: Substitute the expressions for \(TR\) and \(TC\) into the economic profit formula: \(Economic\ Profit = (P \times Q) - (ATC \times Q)\).
Step 5: Factor out \(Q\) to get the formula \(Economic\ Profit = (P - ATC) \times Q\), which correctly calculates economic profit for a monopoly.
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