As you can see in the graph above, a profit maximizing monopolist should shut down if the marginal cost is greater than their average revenue.
This means that they are not making enough money to stay afloat and keep producing.
It also means that they have an opportunity to make more by reducing production costs and increasing prices again.
The graph above shows that a monopolist should shut down if the marginal cost is greater than their average revenue.
This means that they are not making enough money to stay afloat and keep producing.
It also means that they have an opportunity to make more by reducing production costs and increasing prices again.
Do you know what happens when a profit maximizing monopolist shuts down?
The shutdown will cause both the price of output, as well as total profits, to decrease since less goods are being produced on the market (see figure below).
A shutdown can happen due to either decreasing demand or increased supply in other firms.
This then leads into our next section: how does entry affect monopoly pricing? Let’s find out!
