If a regulatory board wanted to make sure that a natural monopoly earned a normal rate of return,it should set price which is equal to:
A) marginal cost.
B) average fixed cost.
C) average variable cost.
D) average total cost.

Question

Quizplus · Accepted Answer

Setting the price equal to average total cost will ensure that the natural monopoly earns a normal rate of return. This is because at the point where price equals average total cost, the firm is able to cover both its variable and fixed costs, and earns a normal profit. Setting the price at marginal cost, as in option A, may not allow the firm to cover its fixed costs and earn a normal profit. Setting the price at either average fixed cost or average variable cost, as in options B and C, would not allow the firm to cover all of its costs, including a normal return on investment.

If a Regulatory Board Wanted to Make Sure That a Natural