Question

Explain the true or false statement: A natural monopolist regulated to price at marginal cost will still make profits.

Answer 1

Ans)- The given statement is true i.e. A natural monopolist regulated to price at marginal cost will still make Profits.

Explanation: At P=MC, a natural monopoly can still make a profit to some extent, because as long as P>ATC, the Firm can make +ve profit and in general form of monopoly's production function at P=MC, Price will be greater than ATC because ATC curve always lies below the MC curve after the intersection of MC and ATC curve.

So, Profit = (P-ATC)*Q

And if P>ATC, then Profit will be positive, hence the monopoly can still make a profit.

But, in general monopoly regulates or operates at MR=MC point, the point at which the firm maximises his profit and after MR=MC point, the profit of the firm starts declining.