If a natural monopoly is told to set price equal to average cost, then the firm
A) sets a price that is lower than its marginal cost.
B) is not able to set marginal revenue equal to marginal cost.
C) will incur an economic loss.
D) automatically also sets price equal to marginal cost.
E) will make a substantial economic profit.

Question

Quizplus · Accepted Answer

Setting price equal to average cost allows the firm to cover its costs, but it does not necessarily equate marginal revenue with marginal cost, which is the condition for profit maximization.

If a Natural Monopoly Is Told to Set Price Equal