When govenment sets price equal to average total cost for a natural monopoly: a.

Question

When govenment sets price equal to average total cost for a natural monopoly: a. the firm will experience losses b. economic profit is equal to zero. c. price will also be equal to marginal cost. d. the outcome is efficient since marginal benefit equals marginal cost. 6. Assuming government regulators are forcing a monopoly seller to charge a price equal to marginal cost: a. economic profit will be equal to zero but production will be inefficient. economic profit will be greater than zero and production will be inefficient. the output level will be efficient but economic profit might be negative. e output level will be inefficient but economic profit will be zero. 273

Explanation / Answer

Answer 5 : When government set price equal to average total cost for natural monopoly that economic profit is equal to zero. The firm is at efficient level but having small dead weight loss. Here the firm is not earning economic profit but they are operate at efficient level of output.

Answer 6 : Assuming government regulators are forcing a monopoly seller to charge a price equal to marginal cost the output level will be efficient but economic profit might be negative because at this period it is social optiumal price where the output level is efficient but the firm is earning negative economic profit and it is subsidised by government.

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