Suppose a monopolist has positive fixed costs and constant marginal costs.If the government regulates a monopoly's price to marginal cost,in the long run:
A) the monopolist will earn a profit if ATC MC.
B) the monopolist will exit the industry.
C) the monopolist will earn a profit if ATC P.
D) the monopolist will earn zero profits.

Question

Suppose a monopolist has positive fixed costs and constant marginal costs.If the government regulates a monopoly's price to marginal cost,in the long run:
A) the monopolist will earn a profit if ATC > MC.
B) the monopolist will exit the industry.
C) the monopolist will earn a profit if ATC > P.
D) the monopolist will earn zero profits.

Quizplus · Accepted Answer

When the government regulates a monopoly's price to marginal cost, the monopolist will not be able to cover their fixed costs and make a profit. As a result, the monopolist will exit the industry in the long run. Option A is incorrect because if ATC is greater than MC, the monopolist would earn a profit, which contradicts with the fact the price has been set at MC. Option C is incorrect because the price has been set at MC, not P. Option D is incorrect because the monopolist will not be able to cover their fixed costs and therefore will not break even.

Suppose a Monopolist Has Positive Fixed Costs and Constant Marginal