Question

A monopolist which suffers losses in the short run will Select one: a. continue to operate as long as total revenue covers fixed cost. b. raise price in order to eliminate losses. c. exit in the long run if there is no plant size that will result in economic profit that is greater than or equal to zero.

Answer 1

Answer: Option (a) is correct.

Step-by-step explanation:

Correct option: Continue to operate as long as total revenue covers fixed cost.

A monopolist can earn supernormal profits, normal profits and losses in the short run but can earn supernormal profits and normal profits in the long run.

Monopolist remains in the market until the total revenue covers the fixed cost of production. It can earn supernormal profits in the long run because the price (i.e average revenue) is greater than the average cost.

This supernormal profits attracts the new firms but there are high restrictions on the entry of the new firms. So, this enables the monopolist to keep all the profits.