If a regulatory commission wishes to allow a firm to earn a normal rate of return, what should it set price equal to?
A) average total cost
B) average variable cost
C) marginal revenue
D) marginal cost

Question

Quizplus · Accepted Answer

In order for a firm to earn a normal rate of return, it must be able to cover all of its costs, including both fixed and variable costs. Setting the price equal to average total cost ensures that the firm is able to cover all of its costs and earn a normal rate of return. Setting the price equal to other costs such as average variable cost, marginal revenue, or marginal cost may not cover all of the firm's costs and may lead to losses or an excessive profit for the firm.

If a Regulatory Commission Wishes to Allow a Firm to Earn