Exhibit 15-4
-If it is allowed to earn only a normal profit, the regulated natural monopoly in Exhibit 15-4 will set price equal to

Question

Exhibit 15-4 
-If it is allowed to earn only a normal profit, the regulated natural monopoly in Exhibit 15-4 will set price equal to

Quizplus · Accepted Answer

When a natural monopoly is allowed to earn only a normal profit, it will set price equal to the point where its average total cost (ATC) curve intersects the demand (AR) curve. In Exhibit 15-4, this intersection occurs at point C, where price is $6 and quantity demanded is 9 units. At this price, the natural monopoly earns a normal profit (zero economic profit), which means that its total revenue equals its total cost, including a normal rate of return. Therefore, the natural monopoly will set price at point C to earn a normal profit.

Exhibit 15-4 -If It Is Allowed to Earn Only a Normal Profit