The diagram at right shows the LRAC and MC curves for a natural monopoly. Long-r
ID: 1124138 • Letter: T
Question
The diagram at right shows the LRAC and MC curves for a natural monopoly. Long-run average costs are falling up to the point where the average total cost intersects the demand curve. a. What price and quantity would exist if the firm were required by regulators to set price equal to average cost? The price in this case would be $ (Round your response to the nearest dollar) The quantity in this case would be |. (Round your response to the nearest whole number.) b. Calculate profits (or losses) for the natural monopoly under average-cost pricing Profits (or losses) in this case would be s(Use minus sign to enter losses, if any. Enter zero, if there is be(Round your response to the nearest whole number.) neither profit, or losses. Round your response to the nearest dollar.) c. Would the outcome be allocatively efficient? o A. Yes, because profits are zero. OB. Yes,because price equals marginal cost C. Yes, because price equals average cost. D. No, because price does not equal marginal cost. O E. No, because profits are not maximized.Explanation / Answer
a. The price in this case will be $98. This is corresponding to the intersection of MC and Demand curve.
The quantity in this case would be 68.
b. Profit in this case would be $1496. This is so because $22 x 68 units = $1496.
c. No the outcome would not be allocatively efficient because price does not equals the MC. Option C.