The dagram at right shows the LRAC and MC ourves for a netural monopoly. Long-ru
ID: 1124197 • Letter: T
Question
The dagram at right shows the LRAC and MC ourves for a netural monopoly. Long-run avenage costs are falling up to the point wher" the·verage lotal cost intersects the der,and one. Natural Monopoly What price and quantily would exist if the 6irm were requred by regulators to set price equal to average cost? The price in this case would be Round your response to the neareat dollar) The quantly in this case would be Round your response to the mearest whole number.) b. Caloulale profts (or losses) for the natural monopoly under average-cost pricing LRAC Prolis (or losses) in Pis case wald bes( ale minus or losses. Round your response to the nearest dolar) c. Would the ouloome be alocalively eicient? b ener losses, rany Enter zero, rthois neherprofe O A. No, because price does not equal marginal cost OB. , because profis we not maanized OC Yes, because price equals marginal cost. O D. Yes, because price equals average cost O E· Yes, because profits are zero. d Suppose now that the firm were required by regulalors to set price equal to marginal cost. What would be the price and quantity in this case? The price would be $ 52 (Round your response to the nearest dallar) ne qartity would be 3(Round your response tothe nearest whole number) e In the case of marginal-cost pricing, the firm will have an economic Would the outoome be allocatively efficient?Explanation / Answer
A monopoly is a market structure where there is only one producer and many buyers of the goods and services. The natural monopoly arises when the firm faces a decreasing average total cost; this provided the monopolist a large cost advantage in comparison to the small producers. The monopolist maximizes its profit by choosing a quantity level where marginal revenue equals marginal cost. The monopolist choses its corresponding price level from the demand curve. The natural monopolist has decreasing average total cost curve.
a)
From the figure, if the firm pets P=LRAC, the equilibrium would occur where the LRAC curve cuts the demand curve.
b)
The profit of a firm is given as (P-AC)*Q. In case of average cost pricing P=AC. Theus the profit in thise is zero.
c)
A distribution would be allocatively efficient iff resources are allocated with the production process such that benefit from each unit of output is equal to the cost of producing that additional unit. The perfect competitive market is most efficient market outcome. In this case the producers acts as price taker and sets P=MC.
Therefore, where the price is set equal to AC, the outcome is not allocatively efficient. Then the correct option is
d)
If the firm sets P=MC, the equilibrium would occur where the MC curve cuts the demand curve. In this case
The allocation would ve allocatively efficint because for the firm P=MC.
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