Asked by Jeanna Ramig on Jun 09, 2024
Verified
If the regulatory agency sets a price where AR = AC for a natural monopoly, output will be:
A) equal to the competitive level.
B) equal to the monopoly profit maximizing level.
C) greater than the monopoly profit maximizing level and less than the competitive level.
D) greater than the competitive level.
Natural Monopoly
Firm that can produce the entire output of the market at a cost lower than what it would be if there were several firms.
Competitive Level
The extent of competition within a market, characterized by the number of firms and their ability to set prices.
- Investigate the effects of monopolistic practices on both consumer and producer surplus, along with their broader implications on general welfare.
- Examine the impact of demand elasticity on strategies aimed at maximizing profits through pricing.
Verified Answer
ES
Eliza Salome-BernalJun 14, 2024
Final Answer :
C
Explanation :
When a regulatory agency sets a price where Average Revenue (AR) equals Average Cost (AC) for a natural monopoly, the output will be greater than the monopoly's profit-maximizing level because the monopoly would prefer to produce less where its marginal revenue equals its marginal cost. However, this output will be less than the competitive level, as competitive markets tend to produce where price equals marginal cost, leading to a higher output level.
Learning Objectives
- Investigate the effects of monopolistic practices on both consumer and producer surplus, along with their broader implications on general welfare.
- Examine the impact of demand elasticity on strategies aimed at maximizing profits through pricing.