Question

question 21 · 1 point
the below graph shows the demand and cost curves for abc electric co, a natural monopoly in a small town which currently operates at its profit maximizing levels at point a. suppose that the government has considered a number of options to regulate this monopoly and has finally decided to force the company to produce the perfectly competitive quantity qe where marginal cost intersects the demand curve. which of the following is a consequence of this regulation?
select the correct answer below:
the firm will lose money and go out of business unless supported by the government
the economy would become less productively efficient, since the good is produced at a higher average cost.
the firm will break even and fail to extract monopoly profits
the firm will produce less than it would if left unregulated, which will cause shortage of the good.

Explanation:

• Option 1:
• In a natural monopoly, the average cost (AC) curve is still declining when it intersects the demand curve. At the perfectly competitive quantity \(Q_e\) (where \(MC = Demand\)), the price \(P_e\) (from the demand curve at \(Q_e\)) is less than the average cost \(AC\) at \(Q_e\) (since \(AC\) is above the demand curve at \(Q_e\) in a natural - monopoly cost - demand structure). So, the firm will make a loss (\(P
• Option 2:
• Productive efficiency occurs when \(P = AC\). In a natural monopoly, forcing the firm to produce at \(Q_e\) (where \(P = MC\)) actually moves the economy towards a more efficient outcome in terms of allocative efficiency (\(P = MC\)), not less productive. Allocative efficiency is about producing the right quantity where the marginal benefit (price) equals the marginal cost.
• Option 3:
• Breaking even occurs when \(P = AC\). But as we saw, at \(Q_e\), \(P
• Option 4:
• The profit - maximizing quantity for a monopoly (\(Q_a\), where \(MR = MC\)) is less than \(Q_e\) (the competitive quantity). So, regulating the firm to produce \(Q_e\) means the firm will produce more than the unregulated monopoly quantity, not less.

Answer:

the firm will lose money and go out of business unless supported by the government