The diagram below shows the market demand curve and the cost curves for a single firm.
FIGURE 12- 6
-Refer to Figure 12- 6.Suppose this firm is being regulated using a policy of marginal- cost pricing.To maintain the resulting level of output
A)the demand curve would have to the left.
B)the average total cost curve would have to shift up.
C)the government would have to accept the allocative inefficiency associated with this level of output.
D)the government would have to subsidize the firm or it will eventually shut down.
E)the regulator would have to allow the firm to keep the monopoly profits at this level of output.

Question

The diagram below shows the market demand curve and the cost curves for a single firm.
  FIGURE 12- 6
-Refer to Figure 12- 6.Suppose this firm is being regulated using a policy of marginal- cost pricing.To maintain the resulting level of output
A)the demand curve would have to the left. 
B)the average total cost curve would have to shift up. 
C)the government would have to accept the allocative inefficiency associated with this level of output. 
D)the government would have to subsidize the firm or it will eventually shut down. 
E)the regulator would have to allow the firm to keep the monopoly profits at this level of output.

Quizplus · Accepted Answer

Under marginal-cost pricing, the firm sets price equal to marginal cost, which may be below average total cost, leading to losses. To maintain this output level, the government would need to subsidize the firm to cover these losses, or the firm would shut down.

The Diagram Below Shows the Market Demand Curve and the Cost