The graph to the right shows the relevant curves for a natural monopoly. The two

Question

The graph to the right shows the relevant curves for a natural monopoly. The two AC curves show a before and after the discovery of a new process that reduces costs. Suppose cost-plus, or fair-return price, method and that regulators can accurately estimate the fim's costs of cost that the firm is regulated using the Grade Category Description: Policles: When the firm's average cost function is represented by the cuive AC 1, what is the firm's economic profit? You can check your a You can view solutior You have two attemp Number After the fim discovers the above mentioned cost savings and is now represented by AC 2, what is the firms economic profit? You lose 10% of the answer in your quest at that answer Number AC2 D eTextbook OHelp With This Top O Web Help & Videos O Technical Support MR Given the profit identified with each cost structure, the firm Quanity O has no incentive to either minimize costs or keep costs high. O has incentive to identify cost saving measures that drive down costs O has incentive to keep cost higher Previous 9Check Answer Next -HE,

Explanation / Answer

1. At AC1, TC= 3.7 *4.5 = 16.65

TR = 5.5*4.5 =24.75

Profit = TR=TC= 8.1

At AC2, profit = TR-TC = 5.5*4.5 – 2*4.5 = 3*4.5 =13.5

Since profit is higher with AC2 , the firm has incentive to decrease its costs

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