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,economic profits to the firm are represented by the area
A)P2P3ad.
B)P2P3ab.
C)0P3aQ1.
D)P1P2bc.
E)There are no economic profits.

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,economic profits to the firm are represented by the area
A)P2P3ad. 
B)P2P3ab. 
C)0P3aQ1. 
D)P1P2bc. 
E)There are no economic profits.

Quizplus · Accepted Answer

Under average-cost pricing, the firm is required to charge a price equal to its average total cost (ATC). The point where the ATC curve intersects the demand curve is point P3, where the price is equal to $8 and the quantity demanded is 12 units. The firm's ATC at this level of output is $8 as well, so there are no economic profits (or losses). Thus, the correct answer is E, as there are no profits to be represented by any of the shaded areas in the diagram.

The Diagram Below Shows the Market Demand Curve and the Cost