Question

which of the following is true? which of the following is true? a monopolist produces on the inelastic portion of its demand. in the short run, a monopoly will shut down if p < avc. the more inelastic the demand, the closer marginal revenue is to price. a monopolist always earns an economic profit.

Answer 1

A monopolist typically operates where demand is elastic, shutting down only when price is below AVC to minimize losses. The inelasticity of demand widens the gap between price and marginal revenue, and while monopolies can earn economic profits, it is not guaranteed in the long run.

Step-by-step explanation:

The question asks about the characteristics of a monopoly and related economic concepts. One of the statements posits that a monopolist produces on the inelastic portion of its demand curve; however, a profit-maximizing monopolist actually prefers to operate where the demand is elastic, where lowering the price leads to a proportionally larger increase in quantity demanded, thereby increasing total revenue.

Another statement claims that in the short run, a monopoly will shut down if price (P) falls below average variable cost (AVC). This is true because the firm would not be able to cover its variable costs, and shutting down would minimize losses, leaving only fixed costs unpaid.

The assertion that the more inelastic the demand, the closer marginal revenue is to price, is incorrect. Actually, the more inelastic the demand, the greater the difference between price and marginal revenue, because a firm with inelastic demand can increase the price without significantly decreasing quantity sold, which separates marginal revenue from the price.

Finally, the claim that a monopolist always earns an economic profit is not necessarily true. While monopolies may have the potential to earn economic profits due to market control, in the long term, economic profits can be eroded by various factors, including new entrants if the market is contestable, regulatory intervention, or changes in demand.

Answer 2

The correct statement is that a monopoly will shut down in the short run if the price is less than the average variable cost, as continued operation would lead to greater losses compared to shutting down. The statement regarding inelastic demand leading to marginal revenue being closer to price is generally true, but not always. Monopolists do not necessarily produce on the inelastic portion of the demand curve, nor do they always earn economic profits.

Step-by-step explanation:

The question addresses concepts in microeconomics related to monopoly behavior and short-run production decisions. Of the given statements, in the short run, a monopoly will shut down if P < AVC is true. This is because if the price falls below the average variable cost (AVC), the firm will not be able to cover even its variable costs, leading to greater losses if it continues to produce rather than if it were to shut down. At shutdown, the firm only incurs fixed costs, which are unavoidable, rather than fixed plus additional variable costs. The more inelastic the demand for a monopolist's product, the more the monopolist can increase price without losing sales, which generally means that marginal revenue is closer to price when demand is inelastic. However, it is not accurate that a monopolist produces on the inelastic portion of its demand curve or that a monopolist always earns an economic profit, since these conditions are not guaranteed and depend on market dynamics and cost structures.