Suppose a Monopolist Charges a Price Corresponding to the Intersection

question 116

Multiple Choice

Suppose a monopolist charges a price corresponding to the intersection of the marginal cost and marginal revenue curves. If this price is between its average variable cost and average total cost curves, the firm will:

• A) earn an economic profit.
• B) stay in operation in the short-run, but shut down in the long run if demand remains the same.
• C) shut down.
• D) none of these.

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Definitions:

Cost of Capital

The rate of return that a business needs to generate in order to cover the cost of generating new capital, which can include debt and equity.

NPV

Net Present Value (NPV) is the calculation used to find the present value of cash flows at a specific discount rate, often used to assess the profitability of an investment.

Payback Period

The amount of time it takes for an investment to generate an amount of income or cash flows to recover the initial capital outlay.

Cash Flows

The net amount of cash and cash-equivalents being transferred into and out of a business, measuring financial health.