The graph provided shows the demand (D), marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves for a monopolist. If a regulatory agency requires that the monopolist set a price that earns the monopolist a normal profit, what price will the monopolist set?

Question

BlackTom AI · Accepted Answer

Normal profit means price equals average total cost (P = ATC), so economic profit is zero (only a normal return on capital).

Relevant concepts:
- Economic (normal) profit occurs when total revenue = total cost, i.e., P = ATC at the produced quantity.
- An unregulated monopolist produces where MR = MC and sets the price on the demand curve above ATC (positive economic profit).
- A regulator seeking to allow only normal profit will choose a price that puts P on the demand curve at the same vertical level as ATC.

Step-by-step reasoning:
1. Identify the ATC curve and the demand curve on the graph. Normal profit requires the price chosen to lie where the demand curve gives a price equal to the ATC level.
2. Find the point where the demand curve intersects the ATC curve (this is the price consumers will pay at the quantity that yields zero economic profit).
3. Read the labeled price at that intersection. On the provided diagram that intersection corresponds to the price labeled P3.
4. Therefore the regulator should set the price at P3 so that total revenue = total cost (zero economic profit).

Why the other options are incorrect:
- P1 and P5 are higher than ATC at the relevant quantities, so pricing at those levels would allow the monopolist to earn positive economic profits (not just a normal profit).
- P2 is the unregulated monopoly price (price set where demand at the monopoly quantity is above ATC), so it also yields positive economic profit.
- P4 is below ATC, which would produce losses (economic profit < 0), not a normal profit.

Conclusion: Setting price equal to ATC yields normal profit; on the graph that price is P3. This confirms the correct answer is P3.

The graph provided shows the demand (D), marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves for a monopolist. If a regulatory agency requires that the monopolist set a price that earns the monopolist a normal profit, what price will the monopolist set?单项选择题

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