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IAI Actuarial Core Principles · Business Economics · Profit maximisation under perfect competition and monopoly

At the output where MR = MC, a monopolist's marginal cost is rising and its price is above average total cost. Which statement is correct?

The monopolist earns supernormal profit, and the MR = MC point is a maximum only if MC cuts MR from below. Price above average cost gives positive profit per unit, and barriers to entry allow it to persist.

  1. AIt earns supernormal profit, and the second-order condition requires MC to cut MR from belowCorrect
  2. BIt earns only normal profit because entry is free
  3. CIt must reduce output since price exceeds MC
  4. DIt would raise profit by producing where price equals MC
  5. It earns a loss because MR is below price

Explanation

Price above ATC at the MR = MC output means supernormal profit per unit of P - ATC. Profit is maximised only if MC cuts MR from below, so that producing beyond that point adds more cost than revenue. Barriers to entry let the profit persist, and P = MC output would be larger and less profitable for a monopolist.

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