If a regulatory commission wishes to allow a firm to earn a normal rate of return,it should set price equal to:

Question

Quizplus · Accepted Answer

Setting price equal to average total cost allows the firm to earn a normal rate of return because it covers both fixed and variable costs, ensuring the firm can continue to operate in the long run. Setting price equal to marginal revenue or marginal cost may not cover all costs and could result in the firm earning less than a normal rate of return or even incurring losses. Setting price equal to average variable cost may not cover fixed costs, which are necessary for the firm to sustain its operations.

If a Regulatory Commission Wishes to Allow a Firm to Earn