Describe the features of a graph (including the locations of curves or important points or intersections on those curves) that shows a market in this situation.

“If marginal cost pricing causes a regulated monopoly to earn negative economic profits, it is likely to exit the market.”

Describe the features of a graph (including the locations of curves or important points or intersections on those curves) that shows a market in this situation. Do this WITHOUT providing the graph.

Expert Solution

A monopolist faces a downward sloping demand curve, and the marginal revenue (MR) curve is downward sloping, lying below the demand curve. Demand and MR curves have the same vertical intercept, but horizontal intercept of MR curve is half that of the demand curve.

Under marginal-cost pricing, the monopolist equates price with MC. At this price level, ATC curve is higher than the MC curve, causing a loss. Since MC intersects ATC at its minimum point, when ATC is higher than Price (= MC), ATC must be downward sloping.

In the graph, the area of loss will be shown by the area enclosed between the ATC curve and the price which equals MC.

Rahul Sunny answered 2 years ago

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