Average cost pricing always guarantees that the monopolist earns zero economic profits but does not ensure a socially optimal market solution.

Question

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Average cost pricing sets the price equal to the monopolist's average cost, which can result in zero economic profits for the firm. However, it does not necessarily lead to a socially optimal market solution as it does not take into account factors such as marginal cost and consumer surplus. Therefore, while it may prevent the monopolist from earning excessive profits, it may not result in the most efficient allocation of resources.

Average Cost Pricing Always Guarantees That the Monopolist Earns Zero