The figure below shows revenue and cost curves of a natural monopoly firm.Figure 14.1

In the figure,
D: Demand curve
MR: Marginal revenue curve
MC: Marginal cost curve
ATC: Average total cost curve
-Refer to Figure 14.1. If the regulatory agency sets the fair-rate-of-return price, the monopolist will:

Question

The figure below shows revenue and cost curves of a natural monopoly firm.Figure 14.1
​
  In the figure,
D: Demand curve
MR: Marginal revenue curve
MC: Marginal cost curve
ATC: Average total cost curve
-Refer to Figure 14.1. If the regulatory agency sets the fair-rate-of-return price, the monopolist will:

Quizplus · Accepted Answer

The fair-rate-of-return price is likely to be set at the point where ATC intersects with demand - the socially optimal price. At this point, the monopolist will earn zero economic profits and just break even. The price will be set in such a way as to ensure that the monopolist's revenues are sufficient to cover its costs, including a normal rate of return on investment. If the monopoly firm was earning super normal profits before, it might have to decrease its price and reduce its profits to the fair-rate-of-return level. Therefore, the monopolist will make neither losses nor super normal profits.

The Figure Below Shows Revenue and Cost Curves of a Natural