Exhibit 13-4 The following diagram contains information on cost and revenue curves facing a regulated monopoly. Refer to Exhibit 13-4.If regulators set a price according to average-cost pricing,the firm will:
A) earn positive economic profits.
B) make zero economic profits.
C) suffer an economic loss.
D) earn the same level of profits as it would absent regulation.

Question

Exhibit 13-4 The following diagram contains information on cost and revenue curves facing a regulated monopoly.  Refer to Exhibit 13-4.If regulators set a price according to average-cost pricing,the firm will:
A) earn positive economic profits. 
B) make zero economic profits. 
C) suffer an economic loss. 
D) earn the same level of profits as it would absent regulation.

Quizplus · Accepted Answer

Average-cost pricing sets the price at the point where the average total cost curve intersects with the demand curve. In this case, the intersection point is where price equals $5 and quantity is 6. At this price, the firm is earning zero economic profits, which is also known as earning a normal rate of return. This is because the price (average cost) is equal to the amount needed to cover all of the firm's costs, including a normal rate of return to compensate investors for their opportunity cost.

Exhibit 13-4 the Following Diagram Contains Information on Cost and Revenue