The diagram below shows cost and revenue curves for a natural monopoly producing electricity.Price is dollars per kilowatt hour and quantity is kilowatt hours per day. FIGURE 12-7
-Refer to Figure 12-7.Suppose this firm is being regulated using a pricing policy of average-cost pricing.In this case,economic profits are equal to
A)$10 000.
B)$6000.
C)$126 000.
D)$28 000.
E)$0.

Question

The diagram below shows cost and revenue curves for a natural monopoly producing electricity.Price is dollars per kilowatt hour and quantity is kilowatt hours per day.  FIGURE 12-7
-Refer to Figure 12-7.Suppose this firm is being regulated using a pricing policy of average-cost pricing.In this case,economic profits are equal to
A)$10 000. 
B)$6000. 
C)$126 000. 
D)$28 000. 
E)$0.

Quizplus · Accepted Answer

Average-cost pricing sets the price equal to the average cost of production, which in this case is $0.08 per kilowatt hour. At this price, the quantity demanded is 60,000 kilowatt hours per day, which is also the quantity produced. The total cost of producing this quantity is $4,800 per day, which is equal to the total revenue earned. Therefore, economic profits are zero (revenue equals cost).

The Diagram Below Shows Cost and Revenue Curves for a Natural