The figure below shows revenue and cost curves of a natural monopoly firm. Figure 12.1 In the figure,
D: Demand curve
MR: Marginal revenue curve
MC: Marginal cost curve
ATC: Average total cost curve
-Refer to Figure 12.1.If the regulatory agency sets the fair-rate-of-return price,the monopolist will:
A)suspend production.
B)just break even.
C)earn super normal profits.
D)incur losses.
E)be able to cover only the variable costs.

Question

The figure below shows revenue and cost curves of a natural monopoly firm. Figure 12.1  In the figure,
D: Demand curve
MR: Marginal revenue curve
MC: Marginal cost curve
ATC: Average total cost curve
-Refer to Figure 12.1.If the regulatory agency sets the fair-rate-of-return price,the monopolist will:
A)suspend production. 
B)just break even. 
C)earn super normal profits. 
D)incur losses. 
E)be able to cover only the variable costs.

Quizplus · Accepted Answer

If the regulatory agency sets the fair-rate-of-return price, it will intersect with the ATC curve at the quantity of output where the monopolist will just break even. At this point, the price will be equal to the average total cost, and the monopolist will not earn any super normal profits or incur any losses. Therefore, the best answer is B.

The Figure Below Shows Revenue and Cost Curves of a Natural