Suppose the local government is considering using marginal cost pricing to set rates for a cable TV company.Which of the following arguments supports marginal cost pricing?
A)Marginal cost pricing gives the monopoly economic profit and a reason to stay in business.
B)Marginal cost pricing gives the firm a normal economic profit and a reason to stay in business.
C)Marginal cost pricing is allocatively efficient.
D)Average cost pricing requires subsidies, which can be costly.
E)Average cost pricing forces monopolies to operate at a loss.

Question

Quizplus · Accepted Answer

Marginal cost pricing is allocatively efficient because it sets the price of the service equal to the marginal cost of providing the service. This ensures that the price reflects the true cost of providing the service and will result in the efficient allocation of resources. Option A is incorrect because marginal cost pricing will not guarantee economic profit for the monopoly. Option B is incorrect because marginal cost pricing will not guarantee a normal economic profit for the firm. Option D is incorrect because average cost pricing may require subsidies, but this is not directly related to the use of marginal cost pricing. Option E is incorrect because average cost pricing may force monopolies to operate at a loss, but this is not directly related to the use of marginal cost pricing.

Suppose the Local Government Is Considering Using Marginal Cost Pricing