Final answer:
A monopolist sets the profit-maximizing price by determining where the market's maximum willingness to pay intersects with the downward-sloping demand curve above the average cost curve. The monopoly leverages its lack of competition and barriers to entry to persistently earn profits by setting prices that the market can bear.
Step-by-step explanation:
When a monopolist determines its profit-maximizing quantity of output, the next step is to decide the price to charge for its products. This price determination process involves assessing the market demand and the value that consumers place on the product. A monopoly is characterized by the absence of competition, which means the firm has significant control over the pricing of its products. When choosing the profit-maximizing price, a monopolist will consider the maximum price the market is willing to pay.
By drawing a dotted line vertically from the profit-maximizing quantity determined on the graph to the downward-sloping demand curve, the monopolist can find the optimal price point. This price is set where the line intersects the demand curve. The selected price must be above the average cost curve to ensure the firm earns a profit. After setting this price, the monopolist can calculate total revenue, total cost, and profit to confirm that the chosen price and quantity will indeed maximize profits.
In such a market, a monopoly may continue to earn profits year after year without the threat of new entrants due to barriers to entry. These persistent profits are a hallmark indicator of a monopoly's market power. However, it's crucial to note that in a perfectly competitive market, high profits would attract new competition, eroding such profits over time. But in a monopolistic setting, those barriers prevent competition from entering and maintain the firm's pricing power.