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Course: AP®︎/College Microeconomics > Unit 6

Lesson 4: The effects of government intervention in different market structures

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The effects of government intervention in different market structures

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This graph shows the average total cost (ATC), marginal cost (MC), demand (D), and marginal revenue (MR) for a natural monopoly.

If the government regulates the price in this market to P_3, which of the following statements is true?

(Choice A)
The firm produces the allocatively efficient quantity but will require a subsidy to remain in the industry.
(Choice B)
The firm will exit in the industry in the long run.
(Choice C)
The firm earns positive economic profit and deadweight loss is eliminated.
(Choice D)
The firm produces a cost-minimizing quantity.
(Choice E)
The firm earns no economic profit and deadweight loss is reduced, but not eliminated.