Consider a cable TV company which is subject to an average-cost pricing regulation. If the number of subscribers decreases

Question

Quizplus · Accepted Answer

With an average-cost pricing regulation, the firm must charge a price that covers its average cost. If the number of subscribers decreases, the firm will have to spread its fixed costs over a smaller number of customers, which will increase its average cost. To cover the higher average cost, the firm will have to charge a higher price per customer. Therefore, choice C is the best answer. Choice A is incorrect because even though the company may have to operate at a smaller profit, it might not necessarily suffer an economic loss. Choice B is incorrect because the demand curve facing the firm does not necessarily shift to the left.

Consider a Cable TV Company Which Is Subject to an Average-Cost