Concept:Abnormal profit is the extra earning a monopolist receives when the selling price is greater than its average total cost of production.
Explanation:A monopolist is the only seller in the market, so it can fix its own price.
Abnormal profit per unit is measured as the difference between price and average total cost, that is,
P−ATC.
For abnormal profit to exist, the monopolist's price must exceed its average total cost, i.e.,
P>ATC.
If
P=ATC, the firm only breaks even with normal profit.
If
P<ATC, the firm incurs a loss.
Option A is incorrect because when marginal cost exceeds marginal revenue, the monopolist will reduce output to maximise profit, not earn abnormal profit.
Option B is incorrect because a perfectly elastic demand curve means the firm cannot raise price, which is not the monopoly situation.
Option C is incorrect because extra advertisement spending raises total cost and does not automatically create abnormal profit.
Therefore, abnormal profit occurs only when the monopolist's price is above its average total cost.
Answer:D. price exceeds average total cost