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,
A) the result is as close to the competitive outcome as possible.
B) the result is allocatively efficient because economic profits are zero.
C) the result is allocatively inefficient because price exceeds marginal cost.
D) the result is allocatively inefficient because the marginal cost curve is downward sloping.
E) the level of output is too low, but the price is allocatively efficient.

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,
A) the result is as close to the competitive outcome as possible. 
B) the result is allocatively efficient because economic profits are zero. 
C) the result is allocatively inefficient because price exceeds marginal cost. 
D) the result is allocatively inefficient because the marginal cost curve is downward sloping. 
E) the level of output is too low, but the price is allocatively efficient.

Quizplus · Accepted Answer

When a firm is regulated using average-cost pricing, the price charged is equal to the average cost of production. In this case, the price exceeds the marginal cost of production, leading to allocative inefficiency. The firm is producing a quantity that is less than the efficient level and charging a price that is higher than the efficient price. Therefore, choice C is the correct answer.

The Diagram Below Shows the Market Demand Curve and the Cost