End of Chapter 5.T uestion Help Consider the natural monopoly shown in the figur

Question

End of Chapter 5.T uestion Help Consider the natural monopoly shown in the figure on the right. Assume that the govenment regulatory agency sets the regulated price, PR, at the level of average total cost at which the demand curve intersects the ATC curve. With price set equal to average total cost, MC O A. the natural monopoly should have a strong incentive to keep its cost down in the future. O B. the natural monopoly has no incentive to keep its average cost down in the future. O C. the natural monopoly would produce its profit-maximizing level of output at the price PR 3 PM D· the natural monopoly would incur a loss at the price PR. ATC OM QR Quantity

Explanation / Answer

HERE WE CAN SEE THAT AS THE PRICES ARE SET EQUAL TO THE AVERAGE TOTAL COST THIS MEANS THAT THE PROFITS WILL BE ZERO AS (P-ATC) = 0

THUS IN FUTURE THE FIRMS WONT HAVE ANY INCENTIVE TO CUT ON THE COSTS.

SO ANSWER IS b

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