Consider the Case of a Natural Monopoly with Falling Long-Run

question 68

Multiple Choice

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

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

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Definitions:

Kinked-Demand Curve

A demand curve that has a flatter slope above the current price than below the current price. Applies to a noncollusive oligopoly firm if its rivals will match any price decrease but ignore any price increase.

Elastic Demand

A situation where the quantity demanded of a good or service changes significantly due to a change in its price.

Marginal Revenue Curve

A curve that shows the change in total revenue resulting from selling one additional unit of a product or service.

Standardized Product

Products that are uniform in quality and features, offering no significant difference from the same products offered by other sellers.