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
1 answer:
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.
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Solution :
According to the theory of demand and supply, the equilibrium price and the quantity is established where both the demand and supply curves intersect.
From the graph, we can see that the point of equilibrium is at the intersection of D and S.
At this point, mathematically, D = S. In order to determine the price and quantity which exists at this point, we need to equate the demand as well as supply functions to calculate the equilibrium values.
∵ D is equal to S, we have
Now substituting this value of the equilibrium price in to any of the functions, we get the equilibrium quantity at this price.
This is the equilibrium quantity. At this point, equilibrium price as well as the quantity is the same. Let the price of the golf club increases from $120 to $140. So substituting the value to the function above to determine the new quantity.
= 100
Therefore, when the demanded quantity decreases from 120 thousand clubs to 100 thousand clubs. This increases the price and decreases the quantity as the supply curve moved to the left. The demand remains constant.