Question

If natural monopolies are regulated to produce where there is a normal profit, they produce where Group of answer choices price equals average total cost. marginal revenue equals marginal cost. price equals marginal cost. marginal revenue equals average total cost. PreviousNext

Answer 1

Answer:

price equals average total cost.

Explanation:

Normal profit exists basically when economic profit = $0. Economic profit is not the same as accounting profit. Accounting profit just considers revenues - actual expenses. While economic profits considers accounting profit - implicit or opportunity costs. Opportunity costs are the extra costs or benefits lost from choosing one activity or investment over another alternative.

A company will maximize its accounting profits when economic profit = $0. This will happen when marginal revenue = marginal costs. All companies should try to sell at this level of output and price, but since the monopoly is being regulated, the price will probably be set considering total costs, not marginal costs.

In the attached graph you can find the point that maximizes profit at (Q,P), but the marginal cost then increases more than total costs. That is why regulators will probably use the average total cost as reference for setting the output for a monopoly.