Figure 8-C
The following diagram contains information on cost and revenue curves facing a regulated monopoly.
-Refer to Figure 8-C.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

Figure 8-C
The following diagram contains information on cost and revenue curves facing a regulated monopoly. 
-Refer to Figure 8-C.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 equal to the firm's average total cost (ATC) curve. In this case, the price would be set at $10, which is where the ATC curve intersects with the demand curve. At this price, the firm would make zero economic profits, as its total revenue (represented by the blue line) would just cover its total cost (represented by the red line). The firm would not earn positive economic profits, nor would it suffer an economic loss, as the price is set at the point where ATC=Price. This is less than the level of profits it would earn absent regulation, which would be at the point where MR=MC (where the red line intersects with the green line), but this is not one of the answer choices.

Figure 8-C The Following Diagram Contains Information on Cost and Revenue Curves