e. Suppose point C is allocatively efficient. What do we
know about each industry in this case?
7. “Allocative efficiency is really about whether the economy ‘has
the quantities right’—it is not really about prices at all. Prices are
important only in a discussion about allocative efficiency because
in a free market changes in prices bring about the efficient
allocation of resources.” Comment on this statement.
8. The following diagram shows the LRAC and MC curves for a
natural monopoly—long-run average costs are falling over the
entire range of the demand curve.
a. Show on the diagram the price and quantity that would
exist if the firm were required by regulators to set price
equal to average cost.
b. In the diagram, show the profits (or losses) in this case.
c. Would the outcome be allocatively efficient? Explain why
or why not.
d. Suppose that the firm were required by regulators to set
price equal to marginal cost. Show on the graph what the
price and quantity would be in this case.