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 average- cost pricing.In this case,

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 average- cost pricing.In this case,

Quizplus · Accepted Answer

With average-cost pricing, the firm sets price equal to average total cost. In this case, the resulting output level is where the marginal cost curve intersects the average total cost curve. Since this point of intersection is to the left of the intersection between the market demand curve and the average total cost curve, the firm is producing a lower quantity than would be produced in a perfectly competitive market. Additionally, the price is set above the marginal cost curve, indicating allocative inefficiency. Therefore, the result is allocatively inefficient because price exceeds marginal cost.

The Diagram Below Shows the Market Demand Curve and the Cost