When a natural monopoly is regulated using marginal cost pricing what is true?

9) “If a natural monopoly is regulated using a marginal cost pricing rule, the firm earns a normal profit.” Is the previous statement correct or incorrect? Answer: The statement is incorrect. If a firm is regulated using a marginal cost pricing rule, the firm incurs an economic loss.

Why is marginal cost pricing used?

If a company is willing to forego profits in the short term, it can use marginal cost pricing to gain entry into a market. However, it is more likely to acquire the more price-sensitive customers by doing so, who are more inclined to leave it if price points increase.

Why is it difficult to regulate a natural monopoly?

Most true monopolies today in the U.S. are regulated, natural monopolies. A natural monopoly poses a difficult challenge for competition policy, because the structure of costs and demand seems to make competition unlikely or costly. This typically happens when fixed costs are large relative to variable costs.

Why is marginal cost more important than average cost?

marginal cost is used for better decision making by using resources efficiently and to identify and practice optimum production levels. The average cost is the sum of the total cost of goods divided by the total number of goods. Marginal cost can be said as the extra expense on producing one additional unit.

What is the main problem with average-cost pricing?

The great thing about average-cost pricing is that a regulated public utility is guaranteed a normal profit, usually termed a fair rate of return. One bad thing about average-cost pricing is that marginal cost is less than average total cost meaning that price is greater than marginal cost.

How does average-cost pricing differ from marginal cost pricing does this solution maximize social well being?

How does average-cost pricing differ from marginal-cost pricing. Does this solution maximize social well-being? ANSWER: Average cost pricing always guarantees that the monopolist earns zero economic profits, but does not ensure a socially optimal market solution.

What are the advantages and disadvantages of the marginal cost pricing rule?

Ignores current market prices – Marginal cost pricing does not consider prevailing market prices. It is strictly based on variable costs. Does not build customer loyalty – Customers who take advantage of marginal cost prices are usually price-sensitive and will not become loyal, long-term purchasers.

What is the advantage of marginal cost pricing?

2. Facilitates cost control – By separating the fixed and variable costs, marginal costing provides an excellent means of controlling costs. 3. Avoids arbitrary apportionment of overheads – Marginal costing avoids the complexities of allocation and apportionment of fixed overheads which is really arbitrary.

Why monopolies should be regulated?

Monopolies eliminate and control competition, which increases prices for consumers and limits the options they have. Many economists study the impact of monopolies, and all agree that there should be some sort of regulation to increase overall welfare for the country.

Whats the difference between marginal cost and average cost?

Marginal cost is the change in total cost when another unit is produced; average cost is the total cost divided by the number of goods produced.

Why is marginal cost different from average cost?

Average cost calculates the effect on the total unit due to change in output level whereas marginal cost is calculated to find out if producing one extra unit of product is profitable or not.

How is price determined under monopoly market?

How is Price Determined under Monopoly Market? Meaning of Monopoly Market. Monopoly means absence of competition. Price Determination Under Monopoly Market. Diagrammatic Representation of Price Determination under Monopoly Market. Price Discrimination. Causes of Monopoly Market. Types of Monopolies. Limits on Monopoly Market. Advantages and Disadvantages of Monopoly Market.

What is the price of monopoly?

Monopoly Price. Thus if a commodity on which a monopoly price has been set has become one of the consumer goods needed by workers, the price “would be paid by a deduction from real wages (that is, the quantity of use-values received by the laborer for the same quantity of labor) and from the profit of the other capitalists.

What is marginal revenue curve in monopoly?

MARGINAL REVENUE CURVE, MONOPOLY. As the only firm on the supply-side of the market, monopoly is a price makerand has extensive market control, facing a negatively-sloped demand curve. If a monopoly wants to sell a larger quantity, then it must lower the price. The marginal revenue curve reflects the degree of market control held by a firm.

What is demand curve in monopoly?

A monopoly is an industry in which there is one seller. Because it is the only seller, the monopolist faces a downward-sloping demand curve, the industry demand curve. The downward-sloping demand curve means that if the monopolist wants to sell more, it must lower its price.