If a regulatory agency ordered a public utility (a natural monopoly) to price all of its output at marginal cost, then the firm
A) would incur losses since the demand curve is perfectly elastic.
B) could incur profits or losses depending on the position of the demand curve and the ATC curve.
C) would lose money unless it is subsidized.
D) would have to shut down.
E) would earn profits since the demand curve is perfectly inelastic.

Question

Quizplus · Accepted Answer

If the demand curve intersects with the average total cost curve at a point where the marginal cost is lower than the average total cost, the firm will make profits. If the demand curve intersects with the average total cost curve at a point where the marginal cost is higher than the average total cost, the firm will incur losses. However, if the demand curve intersects with the average total cost curve at the minimum point of the average total cost curve, the firm will break even. Therefore, the answer is B since the position of the demand curve and the ATC curve will determine whether the firm incurs profits or losses if the regulatory agency orders the firm to price all of its output at marginal cost.

If a Regulatory Agency Ordered a Public Utility (A Natural