Optimal price regulation sets price equal to
A) marginal cost.
B) average variable cost.
C) average cost.
D) minimum average cost.

Question

Quizplus · Accepted Answer

Optimal price regulation sets price equal to marginal cost, because this ensures that resources are allocated efficiently and the production is optimal. If price is set higher than the marginal cost, firms will produce less output and charge higher prices, which reduces social welfare. On the other hand, if price is set lower than marginal cost, firms will incur losses and may exit the market, or reduce investment in new technologies and innovations. Therefore, setting price equal to marginal cost is the best option for optimal price regulation.

Optimal Price Regulation Sets Price Equal to