As an unregulated monopolist, City Cable is earning positive economic profits. If the government regulated the firm by requiring it to produce the level of output that allowed the firm to earn zero economic profit, City Cable would set a price that is equal to its

• A. Marginal Cost
• B. Marginal Revenue
• C. Average Total Cost
• D. Average Variable Cost

Answer: (C)

When zero economic profit is required, total revenue must equal total cost. That means P multiplied by Q equals TC, so the price per unit must equal average total cost (ATC). In other words, P = TC/Q = ATC.

This differs from charging a price equal to marginal cost, which would typically undervalue total costs and fail to cover fixed costs. It also isn’t tied to marginal revenue, which governs unconstrained profit-maximizing behavior rather than the zero-profit constraint. And charging a price only equal to average variable cost would still leave fixed costs unrecovered, yielding negative economic profit. The zero-profit regulation drives the price to ATC.