A local cable company has its rates set at P = $15 by a regulatory commission. Its current output is 10,000 households and its costs are as follows: ATC = $17; AVC = $14; and MC = $15. From this, we can tell that this is:
A) a fair price, and the firm earns a normal profit.
B) a fair price, and the firm earns an economic loss.
C) marginal cost pricing, and the firm earns a normal profit.
D) marginal cost pricing, and the firm earns an economic loss.
E) the same price that an unregulated monopolist would charge.

Question

Quizplus · Accepted Answer

The fact that the regulatory commission has set the price at $15 suggests that this is a case of marginal cost pricing, where the company is expected to charge customers the same amount as it costs to produce and distribute the service. Since the marginal cost is equal to the price, we know that the company is not earning any economic profit. Given that the average total cost is higher than the price (ATC = $17 > P = $15), the firm is incurring losses on each unit sold and therefore experiencing an economic loss. Therefore, choice D is the best answer.

A Local Cable Company Has Its Rates Set at P