Consider the Case of a Natural Monopoly with Falling Average

question 77

Multiple Choice

Consider the case of a natural monopoly with falling average total costs. If regulation sets the price equal to marginal cost, then

• A) the firm would earn economic profits.
• B) the outcome would be allocatively inefficient.
• C) shortages would result.
• D) the firm would operate at a loss and eventually go out of business.
• E) the demand curve would shift to the left.

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Definitions:

No-International-Trade Price

The price level of goods within a country in the absence of international trade, often influenced solely by domestic supply and demand.

Export Supply Curve

A graphical representation showing the relationship between the price of a good on the international market and the quantity that domestic producers are willing to export.

Import Demand Curve

A graph showing the relationship between the price of an imported good and the quantity of the good that consumers in the importing country are willing to buy.

Equilibrium World Price

The price at which the supply of a good on a global scale exactly matches the world demand for that good.