FIGURE 12- 1 Consider three firms,A,B and C,all producing kilos of potatoes (per year)in a perfectly competitive market.The diagrams below show marginal cost curves for each of the three firms.

-One method of regulating a natural monopoly is known as average- cost pricing.Using this method,the regulator requires that the price be set equal to

Question

FIGURE 12- 1 Consider three firms,A,B and C,all producing kilos of potatoes (per year)in a perfectly competitive market.The diagrams below show marginal cost curves for each of the three firms.
 
-One method of regulating a natural monopoly is known as average- cost pricing.Using this method,the regulator requires that the price be set equal to

Quizplus · Accepted Answer

Average-cost pricing requires that the price be set equal to long-run average cost, which includes both fixed and variable costs. This allows the firm to earn a fair rate of return on its investment while also preventing it from charging excessive prices. Therefore, the best choice is E.

FIGURE 12- 1 Consider Three Firms,A,B and C,all Producing Kilos