The diagram below shows the market demand curve and the cost curves for a single firm. FIGURE 12-6
-Refer to Figure 12-6.Suppose this firm is being regulated using a policy of average-cost pricing.In this case,
A)the result is allocatively efficient because economic profits are zero.
B)the result is allocatively inefficient because price exceeds marginal cost.
C)the level of output is too low,but the price is allocatively efficient.
D)the result is as close to the competitive outcome as possible.
E)the result is allocatively inefficient because the marginal cost curve is downward sloping.

Question

The diagram below shows the market demand curve and the cost curves for a single firm.  FIGURE 12-6
-Refer to Figure 12-6.Suppose this firm is being regulated using a policy of average-cost pricing.In this case,
A)the result is allocatively efficient because economic profits are zero. 
B)the result is allocatively inefficient because price exceeds marginal cost. 
C)the level of output is too low,but the price is allocatively efficient. 
D)the result is as close to the competitive outcome as possible. 
E)the result is allocatively inefficient because the marginal cost curve is downward sloping.

Quizplus · Accepted Answer

Average-cost pricing leads to a price that equals the firm's average total cost. In this case, the price exceeds the marginal cost, which means the result is allocatively inefficient. The firm produces less than the socially efficient level of output, and the price is higher than it should be. Therefore, choice B is correct.

The Diagram Below Shows the Market Demand Curve and the Cost