If we compare regulating a natural monopoly using a marginal cost pricing rule to using an average cost pricing rule,we see that output is
A) greater with marginal cost pricing, but average cost pricing allows for costs to be covered.
B) the same under both cases, but the profit is greater with average cost pricing.
C) greater under average cost pricing, but profits are greater with marginal cost pricing.
D) the same but profits are greater with marginal cost pricing.
E) greater with marginal cost pricing, and the firm's profit is larger with marginal cost pricing.

Question

Quizplus · Accepted Answer

Regulating a natural monopoly using a marginal cost pricing rule sets the price equal to the marginal cost of production, which encourages the firm to produce at the socially optimal level of output. This often results in a higher level of output compared to using an average cost pricing rule. However, using an average cost pricing rule allows the firm to cover all of its costs, including fixed costs, which may not be fully covered under marginal cost pricing. Therefore, choice A is the best option.

If We Compare Regulating a Natural Monopoly Using a Marginal