In a monopoly, which statement describes profits in the short run and long run?

• A. In the short run, the firm can earn profit or incur a loss; in the long run, a monopoly earns zero profit.
• B. The monopoly's profits rise in the long run due to efficiency gains.
• C. Monopolies always break even in the short run.
• D. Monopolies never earn profits in any period.

Answer: (A)

The key idea is how profits for a monopoly can look in the short run versus the long run, and how barriers to entry shape what can happen over time.

In the short run, a monopoly decides output where marginal revenue equals marginal cost, and it can charge a price above its average total cost. Because fixed costs are in play, the firm can earn positive economic profit, or incur a loss, depending on demand and costs. The short-run profit depends on the difference between the price the monopolist can charge at the profit-maximizing quantity and the average total cost at that quantity.

In the long run, barriers to entry prevent other firms from entering to erode the monopoly’s profits. That means profits aren’t driven down by new competitors the way they would be in a competitive market. The monopolist can sustain positive profits if price remains above average total cost at the profit-maximizing output. Zero economic profit in the long run is only a special case—price would have to equal ATC at the chosen output—but it is not a guaranteed outcome for a monopoly.

So the essential idea is: short-run profits or losses are possible, and long-run profits can persist due to entry barriers (they’re not automatically driven to zero by competition).