4. Diagram 4 depicts a different price ceiling set by the regulators for the mon

Question

4. Diagram 4 depicts a different price ceiling set by the regulators for the monopoly in Question 2. Answer each of the following with complete explanations:

          a. What is quantity a and why is it important?

          b. What is the value at point b and why is it important?

          c. At what level was the price ceiling set?

          d. At this price ceiling level, will the monopoly make any monopoly profits?

          e. At this price ceiling level, will the monopoly cover its costs?

f. At this price ceiling level, will the monopoly continue in business in the long run?

Explanation / Answer

a. Quantity 'a' refers to the quantity produced (output level). It is important because it shows the output level at which the price ceiling is equal to the ATC.

b. Quantity 'b' represents the ATC to produce “a” units. (ATC = Price) ATC is used to determine profit level.

c. The price ceiling will be set at the intersection of demand curve and ATC curve. This iscalled average cost pricing.

d. No, monopoly will not make profit, as ATC = Price.

e. Yes. Even though profit is not there, monopoly can cover its cost.

f. Yes. Monopoly will continue its production in the long run as its cost is covered and they also make zero economic profit.

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