When a firm is regulated so it uses an average cost pricing rule,the price
A) exceeds average total cost.
B) equals marginal cost.
C) is less than marginal cost.
D) equals average total cost.
E) equals marginal revenue.

Question

Quizplus · Accepted Answer

When a firm is regulated to use an average cost pricing rule, the price that it sets equals its average total cost. This is because the regulation requires the firm to charge a price that covers its costs, but does not allow it to earn any excess profits. Therefore, the firm must use its average cost as a benchmark for setting its price, as this ensures that it is earning a fair return on its investment, but is not exploiting its market power to charge a higher price than necessary.

When a Firm Is Regulated So It Uses an Average