The socially optimal price is to set the price for a regulated monopolist ________.

Question

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The socially optimal price for a regulated monopolist is to set the price equal to marginal cost. This is because at this price, the marginal benefit to society is equal to the marginal cost to the monopolist of producing the good or service. This results in allocative efficiency and maximizes social welfare. Setting the price greater than marginal revenue (A) would lead to higher prices and lower output, causing deadweight loss. Setting the price equal to minimum average variable cost (C) would not cover fixed costs and would lead to the monopolist exiting the market. Setting the price equal to average total cost (D) would lead to zero economic profit, and the firm may not have the incentive to innovate or invest in the long run.

The Socially Optimal Price Is to Set the Price for a Regulated