The figure below shows revenue and cost curves of a natural monopoly firm. Figure 12.1 In the figure,
D: Demand curve
MR: Marginal revenue curve
MC: Marginal cost curve
ATC: Average total cost curve
Refer to Figure 12.1.If the regulatory agency sets the fair-rate-of-return price, the monopolist will:
A)suspend production.
B)just break even.
C)earn super normal profits.
D)incur losses.
E)be able to cover only the variable costs.

Question

The figure below shows revenue and cost curves of a natural monopoly firm. Figure 12.1  In the figure,
D: Demand curve
MR: Marginal revenue curve
MC: Marginal cost curve
ATC: Average total cost curve
Refer to Figure 12.1.If the regulatory agency sets the fair-rate-of-return price, the monopolist will:
A)suspend production. 
B)just break even. 
C)earn super normal profits. 
D)incur losses. 
E)be able to cover only the variable costs.

Quizplus · Accepted Answer

If the regulatory agency sets the fair-rate-of-return price, the monopolist will produce where the MC curve intersects with the ATC curve. This is because the fair-price-of-return is set at a point where the monopolist can just break even. From the graph, it can be seen that this point is around 80 units of output. Therefore, the answer is B, where the monopolist will just break even.

The Figure Below Shows Revenue and Cost Curves of a Natural