You and some friends are discussing news that could change the world as we know it, if the world-changing company
survives! Hermes, a
new automaker, unveils a new automobile that runs on plastic grocery bags and gets 100 miles to the bag. It enjoys a monopoly on this new
technology. Assume that Hermes is a profit-maximizing firm and currently operates at a negative economic profit in the short run.
1. Draw a correctly-labeled graph for Hermes, showing the profit-maximizing price P and quantity Q of the new car. Also shade the area
of the negative economic profit.
2. Why would Hermes continue to operate in the short run if it is earning negative economic profit?
3. What would happen to the total revenue of Hermes if it decided to make one fewer car than Q ? Why?
Monopoly making economic lossUnit cost & revenue ($) – thousandATC10aMC7bEMRDEAR08Quantity (thousands of units sold per year)