A natural monopoly's output is less if it is regulated with
A) a marginal cost pricing rule than if it is unregulated.
B) an average cost pricing rule than if it is unregulated.
C) an average cost pricing rule than if it is regulated with a marginal cost pricing rule.
D) a marginal cost pricing rule than if it is regulated with an average cost pricing rule.
E) More information about the firm's demand is needed to determine how its output depends on what regulation it faces.

Question

Quizplus · Accepted Answer

A natural monopoly produces less output under an average cost pricing rule than under a marginal cost pricing rule because average cost pricing allows the firm to cover its costs, potentially leading to higher prices and lower output compared to marginal cost pricing, which sets prices equal to the marginal cost, encouraging more output.

A Natural Monopoly's Output Is Less If It Is Regulated