A city's gas and electric company operates as a monopolist with average total cost (ATC), marginal cost (MC), and marginal revenue (MR) curves as shown in the graph below. The market demand curve (D) is shown as well. If local regulations cap the price on gas and electricity to maximize social welfare, what profit or loss will the utility company experience? Give the graphical part of your answer by drawing a rectangle with four corners.

 

Does the rectangle in Part 1 represent a profit or a loss? Why?

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Costs and revenue MR D ATC MC Market quantity Costs and revenue MR D ATC MC Market quantity