One solution to the problems of marginal-cost pricing of a regulated natural monopolist is average cost pricing. In this model, the monopolist is allowed to price its production at average total cost. How does average-cost pricing differ from marginal-cost pricing? Does this solution maximize social well-being?
Under average-cost pricing, the monopolist earns zero economic profits, but average-cost pricing does not ensure a socially optimal market solution. Under marginal-marginal cost pricing, the monopolist cannot cover its total costs, so it will earn negative economic profits. (Recall that for a natural monopoly, ATC is declining for all relevant quantities, and MC is below ATC.)
You might also like to view...
If the price of textbooks increases by one percent and the quantity demanded falls by one-half percent, then demand for textbooks is:
A. negative. B. inelastic. C. unit elastic. D. elastic.
In the United States, the money supply (M1) consists of:
A. paper currency and coins. B. coins, paper currency and checkable deposits. C. paper currency, coins, checkable deposits, and savings deposits. D. government bonds, currency, and checkable deposits.
The scarcity problem:
A. persists only because countries have failed to achieve continuous full employment. B. persists because economic wants exceed available productive resources. C. has been solved in all industrialized nations. D. has been eliminated in affluent societies such as the United States and Canada.
The city in which a new casino is likely to have the greatest economic impact would be
A. Las Vegas (where many already exist). B. Denton, TX (north of Dallas, where no casinos already exist). C. Kansas City (where two already exist). D. St. Louis (where three already exist).