The following diagram contains information on cost and revenue curves facing a regulated monopoly.
FIGURE 9-3

-Refer to Figure 9-3. If regulators set a price according to average-cost pricing, what can we conclude about the firm?
A) It will make zero economic profits.
B) It will suffer an economic loss.
C) It will earn the same level of profits as it would absent regulation.
D) It will earn positive economic profits.

Question

The following diagram contains information on cost and revenue curves facing a regulated monopoly.
FIGURE 9-3
 
-Refer to Figure 9-3. If regulators set a price according to average-cost pricing, what can we conclude about the firm?
A) It will make zero economic profits. 
B) It will suffer an economic loss. 
C) It will earn the same level of profits as it would absent regulation. 
D) It will earn positive economic profits.

Quizplus · Accepted Answer

With average-cost pricing, the regulator sets the price equal to the average cost of production. In this case, the average cost curve crosses the demand curve at a price of $8. At this price, the firm's total revenue is $8 x 8 = $64, which is equal to its total cost of production. Therefore, the firm will make zero economic profits.

The Following Diagram Contains Information on Cost and Revenue Curves