Question

The graph below depicts the cost curves of ABC Water and Heat. ABC has a natural monopoly in natural gas delivery in its immediate area. Monopoly pricing Marginal cost pricing Average cost pricing Price ($/MMBTU) Average total cost Marginal cost Marginal revenue Demand Quantity (MMBTU)

Answer 1

a). The monopoly pricing is where the marginal cost equals the marginal revenue of the firm, this is where the profit are maximized.

A. Monopoly pricing. Price B. Average cost pricing. C. Marginal cost pricing. ATC MC Demand - X Quantity

c). If the price equals the marginal cost , the firm would incur a loss and in the long run the firm may shutdown the production and this is not good for the society.

Ans: Under the marginal pricing rule , the firm would earn negative economic profits forcing them to into bankruptcy.

d). If the price equals the average total cost the firm is break even that is the total revenue equals the total cost. This would create much more efficiency than the marginal cost pricing and here the firm has got an incentive to produce.

e).

Ans: Under the average cost pricing, the firm's price would likely to remain steady over time , fixed at the average cost.

e).