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Hero Consider the graph of demand (D), average total cost (ATC), marginal revenue (MR), and marginal cost (MC) for a monopoli
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a). Without the regulation a monopolist firm will produce where the marginal cost equals the marginal revenue, this is the profit maximizing level of price and output.

Profit A Price Loss B A АTC В мс D MR х Quantity

b). If the marginal cost pricing is imposed , the firm would incur losses. This is shown by the red box area. So if this continues, the firm shutdown the production in the long run and which is not good to the society. For increasing the efficiency in this market the government should introduce the average cost pricing so the firm would not incur losses.

Ans: The government will require the firm to set the price equal to average total cost.

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