AP ECONOMICS MULTIPLE CHOICE! 10 EASY POINTS!?

Question

if a regulatory commission want to establish a socially optimal price for a natural monopoly, it should select a price:
a) at which the marginal cost curve intersects the demand curve
b) at which marginal revenue is zero
c) at which the average total cost curve intersects the demand curve
d) which corresponds with the equality of marginal costs and marginal revenue

Answer 1

D.



Because a regulatory agency of a monopoly, not only must allow the monopoly to "break even" on costs, but also allow the company to earn a "fair" profit. Without profits, a company cannot do research and development, and cannot reward it's CEO's with golden parachutes and other benefits which helps them attract good managers to help the company run most efficiently.



Marginal costs and marginal revenue are related to this need for fairness with monopolies.



Every year, private utilities, for example, like electric, water, telephone companies may petition the regulatory agency for their industry to raise prices. To get to raise prices, they have to explain the need for it, how costs have risen in past few years to justify the higher prices.



Monopolies don't have competition, so the sky is the limit, often on what they can charge consumers for products, that's why they need to be regulated.

Answer 2

The answer is A. Normally, the monopolist will set the price and output when MC=MR which the price is higher and the output is smaller then in the perfectly competitive market.If the commission force it to set the price at MC=P or MC intersect the demand curve, the price and output will be the same as in the perfectly competitive market. The consumers will gain the benefit which is what the commission wants to do.

Answer 3

Lol of course.