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.

Question

Quizplus · Accepted Answer

The regulated price of $15 is equal to the firm's marginal cost, indicating that the company is using marginal cost pricing.

However, the firm's average total cost is higher than the regulated price, at $17 per household. This means that the company is incurring an economic loss (revenue from 10,000 households at $15 per household = $150,000, while the total cost of serving those households is $170,000).

Therefore, the best choice is D: marginal cost pricing, and the firm earns an economic loss.

A Local Cable Company Has Its Rates Set at P