Consider the following information for a regional cable television service provider that is a natural monopoly and has a U-shaped long-run average cost curve.(Assume the service provided is basic cable and units are household connections.) - minimum LRAC = $9.00 per month
- minimum efficient scale = 2 million units
- current output = 2.3 million units
- LRAC at current output = $10.25 per month
If this firm is currently being regulated and is following an average-cost pricing policy,the price of the service is ________ per month.
A)less than $9.00
B)$9.00
C)between $9.00 and $10.25
D)$10.25
E)higher than $10.25

Question

Quizplus · Accepted Answer

Since the firm is a natural monopoly and has a U-shaped long-run average cost curve, its LRAC is always above the minimum LRAC. Therefore, the firm is not currently at its minimum efficient scale, and thus, producing at a higher cost. 
Since the firm is currently being regulated and is following an average-cost pricing policy, it must charge a price equal to its average cost, which is currently $10.25 per month. Thus, the correct answer is D, $10.25 per month.

Consider the Following Information for a Regional Cable Television Service