In a monopoly diagram, which area represents earning a profit?

• A. Above the line where ATC = MC
• B. Below the line where ATC = MC
• C. Between MC = ATC and MC = AVC
• D. Under the MC = AVC line

Answer: (A)

Profit shows up when the price is higher than what it costs to produce the quantity sold. In a monopoly diagram, you find the quantity where MR = MC, read off the price from the demand curve at that quantity, and then compare that price to ATC at that same quantity. The area that represents profit is the rectangle with top at the price, bottom at ATC, and width up to the produced quantity. In other words, it's the region above the ATC curve and below the price line, from zero up to the chosen output. The boundary where ATC equals MC isn’t the profit boundary; that point just marks where ATC is minimized. So profit comes from P > ATC, not from being above or below that MC/ATC intersection.