ECON 20A Study Guide - Midterm Guide: Marginal Cost, Natural Monopoly, Perfect Competition
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Fall 2015: maximize profits by producing quantity at which marginal cost=marginal revenue, price=marginal cost, produce at lowest average total cost. Please do well: the following statements are all true in the long run for a firm in a competitive industry. For (b), a monopolist produces where mr=mc, but p>mr, so p>mc. For(c), a firm in a competitive industry produces at minimum atc because p=mc and p=atc, implying that mc=atc. The condition that mc=atc in turn implies production at minimum atc. But for a monopolist, neither p=mc, nor does mc necessarily equal atc. Answer: this is from the textbook, pages 319-320. A natural monopoly has a declining average total cost, and so marginal cost is below average total cost. If price were equal to marginal cost, the firm would incur a loss, and so not stay in business: consider a perfectly competitive industry in long-run equilibrium. The values are not equal, so this is not an equilibrium.
