Asked by Fatima Santos on Jun 19, 2024
Verified
If a regulatory commission imposes upon a nondiscriminating natural monopoly a price that is equal to marginal cost and below average total cost at the resulting output,then:
A) the firm will realize an economic profit.
B) the firm will earn only a normal profit.
C) allocative efficiency will be worsened.
D) the firm must be subsidized or it will go bankrupt.
Nondiscriminating Natural Monopoly
A market condition where a single firm can supply the entire market's demand for a good or service at a lower cost than any competitor, without price discrimination.
Marginal Cost
The cost of producing one additional unit of a product or service, a critical concept in economic decision-making.
Average Total Cost
The total cost of production (fixed costs plus variable costs) divided by the quantity of output produced, representing the per unit cost.
- Understand the consequences of regulatory practices on monopolistic entities, encompassing the principles of allocative efficiency and just returns.
Verified Answer
CB
Chase BrauchieJun 23, 2024
Final Answer :
D
Explanation :
Setting a price equal to marginal cost but below average total cost for a nondiscriminating natural monopoly results in the firm incurring losses because it cannot cover its average total costs. To continue operating without going bankrupt, the firm would need external financial support, such as a subsidy.
Learning Objectives
- Understand the consequences of regulatory practices on monopolistic entities, encompassing the principles of allocative efficiency and just returns.