To the casual observer it is often difficult to understand how a ...

[lak]

To the casual observer it is often difficult to understand how a company would spend several million dollars building a plant or other structure and then simply stop and abandon the project midway. How can this be justified on economic grounds?
 
  What will be an ideal response?

Question 2

Compare and contrast the marginal cost and average cost pricing rules for regulating natural monopolies.
 
  What will be an ideal response?

[FergA]

Answer to Question 1

The building or structure is viewed as a fixed cost. The firm may very well have determined that even if finished the project would not be profitable. Rather than incur additional expenses on a project that is likely not to be profitable it is better to cut losses and abandon production of the structure rather than complete it.

Answer to Question 2

Marginal cost pricing sets the price equal to the marginal cost. It does so by determining the price using the intersection of the marginal cost curve and the demand curve. Marginal cost pricing results in an efficient level of output but the firm incurs an economic loss. Average cost pricing sets the price equal to the average cost. It does so by determining the price using the intersection of the long-run average cost curve and the demand curve. Average cost pricing results in an inefficient level of output and zero economic profit, that is, a normal profit.