Q.How does a monopolist determine the price and output of his product? Explain with the help of a diagram, and state why he can earn supernormal profit even in the long run.

A monopolist is a price maker facing the whole market demand.

The monopolist's revenue curves. Being the only seller, the monopolist faces the downward-sloping market demand as his AR curve. To sell more he must lower price, so MR falls faster and lies below AR.

Determination of output. Like every firm the monopolist maximises profit where

Suppose this gives output OM.

Determination of price. The price is read from the AR (demand) curve vertically above OM — say MP. Since AR lies above MR, the monopoly price MP exceeds MR (and MC). Profit equals the area between price and AC over output OM. …

Numerically, if the demand (AR) is $P = a - bQ$, then $TR = aQ - bQ^{2}$ and $MR = a - 2bQ$; setting $MR = MC$ gives the profit-max …

Reading the monopoly price off the MR curve instead of the AR curve. Output is fixed by MR = MC, but price is always …