Monopoly Graph Question

Question

If a firm is producing where P>ATC>MC>MR, then the firm is producing _____________ output and is making __________.

A. Too much ; profits

B. Too much ; losses

C. Too little ; profits

D. Too little ; losses

Answer 1

This is a good example of why some multiple choice problems are problematic. Multiple-choice questions may be tricky because of ambiguity. In this case “too much” or “too little” depends on your perspective.  From the monopolist’s perspective it is (A) too much because they are not maximizing profit where MR = MC, but from society’s perspective it is (C) too little because of the deadweight loss created.  A student answering C has a good argument they are also correct!

Answer 2