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 marginal-cost pricing.To maintain the resulting level of output
A)the government would have to subsidize the firm or it will eventually shut down.
B)the regulator would have to allow the firm to keep the monopoly profits at this level of output.
C)the government would have to accept the allocative inefficiency associated with this level of output.
D)the average total cost curve would have to shift up.
E)the demand curve would have to the left.

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 marginal-cost pricing.To maintain the resulting level of output
A)the government would have to subsidize the firm or it will eventually shut down. 
B)the regulator would have to allow the firm to keep the monopoly profits at this level of output. 
C)the government would have to accept the allocative inefficiency associated with this level of output. 
D)the average total cost curve would have to shift up. 
E)the demand curve would have to the left.

Quizplus · Accepted Answer

Marginal-cost pricing means setting the price equal to the marginal cost of production, which in this case is equal to $10 per unit. At this price, the firm will produce 20 units of output. However, the average total cost for producing 20 units is $15, which means that the firm is incurring losses. To maintain the resulting level of output, the government would have to subsidize the firm or it will eventually shut down. Therefore, choice (A) is the correct answer. Choice (B) is not applicable because marginal-cost pricing eliminates monopoly profits. Choice (C) is incorrect because marginal-cost pricing is the most allocatively efficient pricing policy. Choice (D) is incorrect because the average total cost curve is already given in the diagram and it does not shift. Choice (E) is incorrect because the demand curve is also fixed and does not shift.

The Diagram Below Shows the Market Demand Curve and the Cost