Question

A pure monopolist is producing an output such that ATC = $4, P = $5, MC = $2, MR = $3, and AVC = $2.50. What is this firm realizing?

1) Economic profit
2) Normal profit
3) Loss
4) Break-even point

Answer 1

The firm is realizing an economic profit because the selling price of $5 is greater than the average total cost of $4.

Step-by-step explanation:

A pure monopolist is producing an output where the Average Total Cost (ATC) is $4, the price (P) is $5, the Marginal Cost (MC) is $2, the Marginal Revenue (MR) is $3, and the Average Variable Cost (AVC) is $2.50. To determine what this firm is realizing, we look at the relationship between price and average total cost. Since the price is greater than the average total cost (P > ATC), the firm is making an economic profit.

Based on this information, the correct answer is 1) Economic profit. This outcome occurs because the firm is able to sell its product for more than the average cost of production, including both variable and fixed costs, resulting in profits over and above the normal return on investment.