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Author Question: If, for a given percentage increase in price, quantity supplied increases by a proportionately ... (Read 68 times)

maychende

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on: Jun 29, 2018
If, for a given percentage increase in price, quantity supplied increases by a proportionately larger percentage, then supply is
 
  A) unit elastic. B) relatively inelastic. C) elastic. D) perfectly elastic.

Question 2

What is the average cost pricing rule? Why is it not an efficient way of regulating monopoly?
 
  What will be an ideal response?
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mjbamaung

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Reply #1 on: Jun 29, 2018
Answer to Question 1

C

Answer to Question 2

An average cost pricing rule requires that the firm set its price equal to its average total cost and produce the quantity at which the LRAC curve intersects the demand curve. This pricing rule leads to an inefficient quantity of output. Allocative efficiency requires that the quantity produced be the amount for which the marginal social benefit, shown on the demand curve, equal marginal social cost, which is shown on the marginal cost curve. Efficiency requires that P = MC. When a natural monopoly is regulated using an average cost pricing rule, P = LRAC and at the quantity produced LRAC > MC. Combining these results shows that P > MC, which means that the firm is producing an inefficient amount of output.


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