The figure above shows a natural monopoly.
-In the figure above,if the firm is regulated using an average cost pricing rule,the firm
A) avoids an economic loss, but produces less than the efficient quantity and creates a deadweight loss.
B) incurs an economic loss, but produces the efficient quantity and creates a deadweight loss.
C) avoids an economic loss, is able to produce the efficient quantity, and therefore avoids creating a deadweight loss.
D) avoids an economic loss, produces the efficient quantity, and creates a deadweight loss.
E) incurs an economic loss, produces the efficient quantity, and avoids creating a deadweight loss.

Question

The figure above shows a natural monopoly.
-In the figure above,if the firm is regulated using an average cost pricing rule,the firm
A) avoids an economic loss, but produces less than the efficient quantity and creates a deadweight loss. 
B) incurs an economic loss, but produces the efficient quantity and creates a deadweight loss. 
C) avoids an economic loss, is able to produce the efficient quantity, and therefore avoids creating a deadweight loss. 
D) avoids an economic loss, produces the efficient quantity, and creates a deadweight loss. 
E) incurs an economic loss, produces the efficient quantity, and avoids creating a deadweight loss.

Quizplus · Accepted Answer

In a natural monopoly, the efficient quantity is where the demand curve intersects the minimum point on the average total cost (ATC) curve. However, with average cost pricing, the firm produces at the point where the price equals the average cost. In this case, it is where the demand curve intersects the ATC curve at a higher level than the efficient quantity, resulting in underproduction (produces less than the efficient quantity) and a deadweight loss. While the firm avoids an economic loss, it is not producing at the socially optimal level, resulting in deadweight loss. Therefore, option A is the correct answer.

The Figure Above Shows a Natural Monopoly