-If a Marginal Cost Pricing Rule Is Imposed on the Natural

question 523

Multiple Choice

-If a marginal cost pricing rule is imposed on the natural monopoly in the figure above, then the firm will

• A) incur an economic loss.
• B) make zero economic profit, that is, its owners make a normal profit.
• C) make an economic profit of $4 million.
• D) make an economic profit of $16 million.

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Definitions:

Purely Competitive Firm

refers to a company that operates in a market where there are many buyers and sellers, no barriers to entry, and the product is a commodity, leading the firm to be a price taker.

Monopolistic Competition

An economic model featuring a multitude of firms that market products which are alike but not the same, enabling a certain amount of market control and differentiation of products.

Demand Curve

A graphical representation showing the relationship between the price of a good or service and the quantity demanded by consumers.