For a natural monopoly firm, the resource-allocative efficient output is 200 units. The highest per-unit price that can be charged for this output is $3. Average total cost at 200 units is $3.50. For the natural monopoly firm that produces and sells 200 units of output,

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The fact that the highest per-unit price that can be charged for the output is $3 implies that the firm faces a downward sloping demand curve. In order to maximize profits, the firm should produce where marginal revenue (MR) equals marginal cost (MC). However, since the firm is a natural monopoly, its MC curve intersects its demand curve at a lower output level than the socially optimal level. Therefore, the resource-allocative efficient output of 200 units is below the profit-maximizing output level. At this output level, the price charged is $3, which is equal to the average revenue (AR) and the MR. Since MC is below ATC at this output level, the firm is earning positive economic profits. Since the firm is earning profits, it is not taking losses of $1.50 per unit. Therefore, choice B is incorrect. In addition, fixed costs and variable costs cannot be zero for a firm that produces and sells output. Therefore, choices C and D are also incorrect. Finally, since MC is below ATC at 200 units, choice A is correct.

For a Natural Monopoly Firm, the Resource-Allocative Efficient Output Is