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,under marginal-cost pricing,a firm would require a government subsidy of at least _____ to remain profitable.

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,under marginal-cost pricing,a firm would require a government subsidy of at least _____ to remain profitable.

Quizplus · Accepted Answer

Under marginal-cost pricing, the firm sets price equal to marginal cost. If this price is below average total cost, the firm incurs a loss. The subsidy required to cover this loss is the area between the price and average total cost over the quantity sold, which is represented by the area P₃CBP₂.

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