Post by: connormoss on Nov 23, 2022
The graph shows the demand curve (D), marginal cost curve (MC), marginal revenue curve (MR), and average total cost curve (ATC) for a natural monopoly.
Assume that P1=$7, P2=$12.50, P3=$12.75, P4=$25, Q1=30, Q2=103, and Q3=139. If regulators use the marginal cost rule to set price, what is the monopoly's loss? If the regulators use the average cost rule to set price, what is the monopoly's profit?
Please round your final answer to two decimal places.
◦ $25.75, $0
◦ $25.75, $764.50
◦ $764.50, $0
◦ $764.50, $25.75
Post by: tharris7314 on Nov 23, 2022
Using the marginal cost rule, price is set equal to marginal cost (MC) to achieve an efficient output. In this example, MC hits the demand curve at P1=$7 and Q3=139 units are produced.
Remember, Profit = (Price - Average total cost)*Quantity = (P - ATC)*Q = (P1 - P2)*Q3 = (7 - 12.50)*139 = -$764.50.
At this quantity, ATC exceeds the price, so the firm suffers a loss of $764.50.
Using the average cost rule, price is set equal to average total cost (ATC) so the regulated firm avoids an economic loss. In this example, ATC hits the demand curve at P3=$12.75 and Q2=103 units are produced.
Profit = (P - ATC)*Q = (P3 - P3)*Q2 = (12.75 - 12.75)*103 = $0.