Suppose a monopolist faces a demand curve of the form P = 180 - 2Q. This monopolist faces a total cost curve of the form TC = 20Q. If this monopolist was regulated with "average cost pricing" so as to make a "normal" rate of return, what would be the price the government requires the monopolist to charge? What would be the monopolist's profit?Group of answer choicesP = $20; The monopolist would make a loss, which would be subsidised by the government.P = $100; The monopolist would make a loss, which would be subsidised by the government.P = $0; The monopolist would make a loss, which would be subsidised by the government.P = $100; The monopolist would make a positive economic profit.P = $20; The monopolist would make a zero economic profit.
Question
Suppose a monopolist faces a demand curve of the form P = 180 - 2Q. This monopolist faces a total cost curve of the form TC = 20Q. If this monopolist was regulated with "average cost pricing" so as to make a "normal" rate of return, what would be the price the government requires the monopolist to charge? What would be the monopolist's profit?Group of answer choicesP = 100; The monopolist would make a loss, which would be subsidised by the government.P = 100; The monopolist would make a positive economic profit.P = $20; The monopolist would make a zero economic profit.
Solution
To solve this problem, we first need to understand what "average cost pricing" means. In this context, it means that the price the monopolist is allowed to charge is equal to the average cost of production.
The average cost (AC) is calculated by dividing the total cost (TC) by the quantity (Q). Given the total cost curve TC = 20Q, the average cost is AC = TC/Q = 20Q/Q = 20.
Under average cost pricing, the monopolist is allowed to charge a price equal to the average cost, so the price would be P = $20.
To calculate the monopolist's profit, we subtract the total cost from the total revenue. The total revenue (TR) is calculated by multiplying the price (P) by the quantity (Q). Given the demand curve P = 180 - 2Q, we can substitute P = 20 to find the quantity: 20 = 180 - 2Q, which gives Q = 80.
The total revenue is then TR = PQ = 20*80 = 1600. Therefore, the monopolist's profit is TR - TC = 1600 = $0.
So, the correct answer is: P = $20; The monopolist would make a zero economic profit.
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