Which of the following is a criticism of average-cost pricing as a regulatory response to a natural monopoly?
A) With average-cost pricing, output produced is smaller than the efficient level of output.
B) Firms that practice average-cost pricing suffer persistent losses.
C) Imperfect information about the firm's costs reduces the effectiveness of average-cost pricing.
D) Under average-cost pricing, the market price is lower than the efficient price.
E) Answers with average-cost pricing, output produced is smaller than the efficient level of output and imperfect information about the firm's costs reduces the effectiveness of average-cost pricing are both correct.

Question

Quizplus · Accepted Answer

Both options A and C are criticisms of average-cost pricing as a regulatory response to a natural monopoly. Option A states that with average-cost pricing, the output produced is smaller than the efficient level of output, while option C explains that imperfect information about the firm's costs reduces the effectiveness of average-cost pricing. Therefore, the best choice is E, as both options A and C are valid criticisms of average-cost pricing. Option B is incorrect because firms that practice average-cost pricing generally earn a normal rate of return. Option D is incorrect because under average-cost pricing, the market price is equal to the efficient price.

Which of the Following Is a Criticism of Average-Cost Pricing