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 maximum price allowed in the market is P₁,output levels below Q₁ will: A)yield more economic profit than at Q₁. B)yield positive but lesser economic profit than at Q₁. C)yield negative economic profit. D)yield zero economic profit.

Question

Quizplus · Accepted Answer

If the maximum price allowed in the market is P₁, the natural monopoly will produce the output level Q₁ where marginal cost intersects with demand curve. At this output level, the price (P1) charged by the monopoly is higher than the average cost (AC1), which means it is able to make positive economic profit. However, if the output level is below Q₁, the price charged by the monopoly would be lower than the average cost, resulting in negative economic profit. Therefore, options A and B are incorrect. Zero economic profit is not a feasible option for a natural monopoly in the long run. Therefore, the best choice is option C, where output levels below Q₁ would yield negative economic profit.

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