Which of the following explains why the marginal cost pricing rule results in an economic loss for a natural monopoly?
A) The demand curve is downward sloping, therefore price falls as quantity increases.
B) The MC is constant and equal to price.
C) The ATC curve is downward sloping throughout the relevant range, therefore the MC is lower than the ATC.
D) The firm's MR is always less than its price.
E) Because output is determined by setting MC equal to the price, consumer surplus is maximised.

Question

Quizplus · Accepted Answer

The marginal cost pricing rule sets the price equal to the marginal cost of production, which is lower than the average total cost (ATC) for a natural monopoly because the ATC curve is downward sloping. Therefore, the firm is not covering all of its costs and will incur an economic loss.

Which of the Following Explains Why the Marginal Cost Pricing