Price and cost (dollars per household) 30 25 20 15 ATC 10 MC 2 468 0 12 Quantity

Question

Price and cost (dollars per household) 30 25 20 15 ATC 10 MC 2 468 0 12 Quantity (millions of households) The figure above shows a natural monopoly regulated using a marginal cost pricing rule. 8) In the figure above, an A) efficient output results, but the firm incurs a loss per household which must be subsidized in some way. B) inefficient output results, though the firm covers its costs. C) inefficient output results because the firm cannot cover its costs. D) efficient output results because consumer surplus is maximized. E) efficient output results, though marginal costs exceed average total costs.

Explanation / Answer

According to the marginal cost pricing rule, A natural monopoly efficient quantity will exist at a point where Marginal cost is equal to demand. Corresponding to this quantity, there will be a loss because at this quantity ATC will be greater than the price.

Hence option A is the correct answer.

It means in the given figure, the efficient quantity results but the firm incurs a loss per household which must be subsidized in some way.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.