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A-Level Economics · Monopoly (supernormal profit) diagram question

EVALUATION: the monopolist keeps rectangle ABFE year after year. What is the strongest case IN FAVOUR of allowing it?

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The diagram

The answer

It can reinvest the profit in R&D — dynamic efficiency, as Apple turned monopoly-like profit into the iPhone, iPad, Watch and AirPods. ABFE can fund research, new products and a lower AC curve over time. State the pro, then its counter: the money may leave as dividends instead. The evaluation lives inside the profit box. ABFE could be reinvested into technology and new products — dynamic efficiency, with AC shifting down and some saving passed on. But it could equally go out as dividends, wages or debt repayment, and with no rival there is no pressure to innovate at all. Argue both sides off the same rectangle and label it on the diagram.

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This is one of 6 questions on the monopoly (supernormal profit) diagram — every corner lettered, every wrong answer diagnosed.

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