The following figure shows the average cost [AC],marginal cost [MC],and demand [D] curves for a natural monopoly;Qi denotes quantity and Pi denotes price.
Figure 15-3
-In Figure 15-3,if the monopoly is forced to use the average-cost pricing policy,it would:
A)produce Q2 at a price P3 and make zero economic profit.
B)produce Q3 at a price P4 and make positive economic profit.
C)produce Q1 at a price P1 and make zero economic profit.
D)produce Q2 at a price P3 and make positive economic profit.

Question

The following figure shows the average cost [AC],marginal cost [MC],and demand [D] curves for a natural monopoly;Qi denotes quantity and Pi denotes price.
Figure 15-3 
-In Figure 15-3,if the monopoly is forced to use the average-cost pricing policy,it would:
A)produce Q2 at a price P3 and make zero economic profit. 
B)produce Q3 at a price P4 and make positive economic profit. 
C)produce Q1 at a price P1 and make zero economic profit. 
D)produce Q2 at a price P3 and make positive economic profit.

Quizplus · Accepted Answer

Average-cost pricing policy means that the monopoly sets its price equal to its average cost. In this case, the average cost curve intersects the demand curve at point Q1, which corresponds to a price of P1. At this quantity and price, the monopoly would make zero economic profit because its average cost equals its price.

If the monopoly were to produce at Q2 and charge the corresponding price P3, it would make positive economic profit because its marginal cost is below this price. Similarly, if it were to produce at Q3 and charge the corresponding price P4, it would make even higher profits. However, both of these options would violate the average-cost pricing policy. Therefore, the best choice is C: produce Q1 at a price P1 and make zero economic profit.

The Following Figure Shows the Average Cost [AC],marginal Cost [MC],and