Chapter 62, Problem 7MCQ

To determine

Condition for operating a price-regulated natural monopoly in long run.

Answer to Problem 7MCQ

(a) Average total cost where the average total cost curve meets the demand curve.

Explanation of Solution

If a regulated natural monopoly price is set equal to the marginal cost, then the monopolist would not be willing to produce in the long run because it suffers a loss so the price should be set above the marginal cost so that it can covet its average total cost. Therefore, ATC must cut the demand curve to be allocative efficient. And below that ATC, the seller would suffer loss, hence option (a) is correct as it satisfies the condition, and options (b), (c), (d), and (e) are incorrect.

Economics Concept Introduction

In a regulated natural monopoly, the price is set by the government which will be naturally lower but higher than marginal cost so the output would be greater, consumer surplus would be more due to low price and profit would be less as compared to an unregulated natural monopoly. In long run, a regulated natural monopoly price must be higher than the marginal cost to be in the market, otherwise, it suffers loss and does not operate.