If a regulatory board wanted to make sure that a natural monopoly chose a price resulting in the efficient level of output, it should set a price equal to:
A)marginal cost.
B)average fixed cost.
C)average variable cost.
D)average total cost.
E)average total cost, plus a ten percent normal return on investment.

Question

Quizplus · Accepted Answer

Setting the price equal to marginal cost ensures that the natural monopoly is producing at the efficient level of output where price reflects the actual cost of production. This encourages the company to produce the optimal quantity of output where marginal cost equals marginal revenue, leading to efficient allocation of resources. In contrast, setting the price equal to average total cost or adding a normal return on investment may result in a higher than optimal price or inefficient allocation of resources.

If a Regulatory Board Wanted to Make Sure That a Natural