If the government requires a natural monopoly to price at marginal cost,
A)monopoly firms will earn zero economic profits because the price of the good equals the cost of producing that good.
B)monopoly firms will operate at a loss because P

Question

If the government requires a natural monopoly to price at marginal cost,
A)monopoly firms will earn zero economic profits because the price of the good equals the cost of producing that good.
B)monopoly firms will operate at a loss because P < AC.
C)more firms will be able to enter the market.
D)producer surplus will increase because quantity supplied is greater.

Quizplus · Accepted Answer

When a natural monopoly is required to price at marginal cost, it will likely operate at a loss because the price (P) will be less than the average cost (AC) of production. Natural monopolies have high fixed costs and decreasing average costs over the relevant range of output, so pricing at marginal cost doesn't cover the total costs.

If the Government Requires a Natural Monopoly to Price at Marginal