Chapter 77, Problem 7MCQ

To determine

What the firm will do if the regulated price for a natural monopoly is set where the marginal cost curve intersects the demand curve?

Answer to Problem 7MCQ

From the available options, the correct option is to shut down in the long run.

Explanation of Solution

The company will surely shut down in the long run when the regulated price for a natural monopoly is fixed where the marginal cost curve intersects the demand curve because it will not possible for the firm to generate economic profit in the long run. Here, all options of profits, increase in the output, MR = ATC are incorrect because the firm experiences the price where the MC curve cuts the demand curve and the firm is unable to gain any profit.

Therefore, the correct option is a (shutdown in the long run).

Economics Concept Introduction

Introduction: A monopoly that involves high start-up costs and barriers to entry and provides the largest supplier in any industry is called a natural monopoly because it covers powerful economies of scale to conduct the business. A person who has a monopoly on the business is called a monopolist.