If a natural monopoly is told to set price equal to average cost,then the firm
A) is not able to set marginal revenue equal to marginal cost.
B) automatically also sets price equal to marginal cost.
C) will make a substantial economic profit.
D) will incur an economic loss.
E) sets a price that is lower than its marginal cost.

Question

Quizplus · Accepted Answer

When a natural monopoly sets price equal to average cost, it covers its costs but does not necessarily set marginal revenue equal to marginal cost, which is required for profit maximization.

If a Natural Monopoly Is Told to Set Price Equal