Refer to the Diagram for a Natural Monopolist

question 399

Multiple Choice

Refer to the diagram for a natural monopolist. If a regulatory commission set a maximum price of P₂, the monopolist would

• A)produce output Q₁ and realize an economic profit.
• B)produce output Q₃ and realize an economic profit.
• C)close down in the short run.
• D)produce output Q₃ and realize a normal profit.

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Definitions:

Absorption Costing

A costing method that includes all manufacturing costs, both fixed and variable, in the cost of goods sold.

Predetermined Overhead Rate

A rate calculated before the accounting period begins, used to allocate manufacturing overhead costs to individual products based on a certain activity base.

Normal Cost System

A costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job.

Job Cost Sheet

A document that records the materials, labor, and manufacturing overhead costs assigned to each individual job in production.