Figure 15-15 shows the cost and demand curves for the Erickson Power Company.
-Refer to Figure 15-15.If the government regulates Erickson Power Company so that the firm can earn a normal profit,the price would be set at ________ and the output level is ________.
A)P1,Q4
B)P2,Q3
C)P2,Q2
D)P3,Q2

Question

Figure 15-15 shows the cost and demand curves for the Erickson Power Company.
-Refer to Figure 15-15.If the government regulates Erickson Power Company so that the firm can earn a normal profit,the price would be set at ________ and the output level is ________.
A)P1,Q4 
B)P2,Q3 
C)P2,Q2 
D)P3,Q2

Quizplus · Accepted Answer

If the government regulates the firm to earn only normal profit, it will set the price at the point where the demand curve intersects the average cost curve (at P2). At this price level, the firm will produce an output level where the marginal cost equals the price (at Q3). This allows the firm to earn normal profit (zero economic profit), which is represented by the point where the average total cost curve intersects the demand curve (at point A). Choosing any other price and quantity combination would either result in the firm earning economic profits or incurring losses.

Figure 15-15 Shows the Cost and Demand Curves for the Erickson