The graph to the right shows the relevant curves for a natural monopoly. The two
ID: 1198765 • Letter: T
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The graph to the right shows the relevant curves for a natural monopoly. The two AC curves show average cost before and after the discovery of a new process that reduces costs. Suppose that the firm is regulated using the cost-plus method and that regulators can accurately estimate the firm's costs of production. Please answer all three parts, thanks!
Question 11 of 15 Incorrect Map sapling learning The graph to the right shows the relevant curves for a natural monopoly. The two AC curves show average cost before and after the discovery of a new process that reduces costs. Suppose that the firm is regulated using the cost-plus method and that regulators can accurately estimate the firm's costs of production. hen the firm's average cost function is represented by the curve AC 1, what is the firm's economic profit? Incorrect profit when the firm is allowed . Y ou calculated the Number to profit maximize. Here the firm is regulated to charge what $8.10 price? What quantity will they 6.2 produce then? Profits? 5.5 After the firm discovers the above mentioned cost savings and is now represented by AC 2, what is the firm's economic profit? 3.7 C1 Number AC2 1.4 M $15.75 MR 3.8 4.5 7.4 8.69 Given the profit identified with each cost structure, the firm: Quantity O has no incentive to either minimize costs or keep costs high O has incentive to keep cost higher O has incentive to identify cost saving measures that drive down costs.Explanation / Answer
In the cost-plus regulation, the natual monopoly firm is not allowed to make only normal profits, and no economic profits. That is, the firm is allowed to charge not more than the average cost, because when the firm charges a price equal to the average costs, then the firms economic profits are zero and the firms are able to cover the costs (both implicit and explicit).
Under this method of regulation, the firm's economic profit is always zero. Therefore, the answer to both the first two questions is zero.
Since the firm's profit will stay zero regardless of whether or not it uses the new production process that shifts the average cost curve down, the firm has no incentive to either minimize costs or keep costs high.
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