Which of the following statements regarding a marginal-cost pricing rule for a natural monopoly is WRONG?
A) It maximizes total surplus in a regulated industry.
B) The firm produces the efficient quantity.
C) The firm's price equals its marginal cost.
D) The firm earns an economic profit.

Question

Quizplus · Accepted Answer

A natural monopoly faces a downward-sloping demand curve, which means that its marginal revenue is less than its price. Therefore, setting price equal to marginal cost would result in the firm operating at a loss. To avoid this, regulators often allow the firm to charge a price that is slightly above its marginal cost but still lower than its average total cost. This ensures that the firm covers its costs and earns a normal profit, but does not earn an economic profit. Therefore, statement D is incorrect.

Which of the Following Statements Regarding a Marginal-Cost Pricing Rule