"Rate averaging" is only possible if
A)the firm is protected from price competition and new entry.
B)the firm is protected from losses resulting from unsuccessful innovation.
C)the firm can choose the level of service it wishes to provide.
D)"cream skimming" is permitted.

Question

Quizplus · Accepted Answer

Rate averaging refers to the practice of charging a uniform price for a service regardless of the cost of providing it. This is only possible if the firm is protected from price competition and new entry, which would drive prices down to a competitive level. If the firm has to compete on price, it will have to charge different prices to different customers based on their willingness to pay, which would result in price discrimination rather than rate averaging. Likewise, if the firm is subject to losses resulting from unsuccessful innovation, it will have to charge higher prices to compensate for these losses, which again would make rate averaging impossible. The firm's ability to choose the level of service it wishes to provide is irrelevant to the question of rate averaging, as rate averaging is only concerned with pricing, not service quality. "Cream skimming" refers to the practice of focusing on the most profitable customers and ignoring less profitable ones, and has no bearing on the question of whether rate averaging is possible.

"Rate Averaging" Is Only Possible If