Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It allows prices to be set above marginal cost, maximizing profits.
B
It restricts prices to be equal to marginal cost, potentially leading to losses for the firm.
C
It forces prices to be below marginal cost, ensuring higher consumer surplus.
D
It has no effect on pricing strategies in a natural monopoly.
Understanding the Answer
Let's break down why this is correct
Answer
A natural monopoly occurs when a single company can supply a good or service more efficiently than multiple companies due to high fixed costs and low marginal costs. When a government sets a price ceiling, it limits how high the company can charge for its product, which is meant to protect consumers from excessively high prices. If the company is required to use marginal cost pricing, it must set the price equal to the cost of producing one more unit of the product. This often leads to a situation where the company cannot cover its total costs, as the price may be lower than the average cost of production. For example, if a utility company can produce electricity for $0.
Detailed Explanation
Setting a price ceiling means the price cannot go above a certain level. Other options are incorrect because Some might think a price ceiling lets firms charge more to earn more profit; This option suggests prices would be lower than costs, which is not true.
Key Concepts
marginal cost pricing
price ceiling
Topic
Pricing in Natural Monopolies
Difficulty
medium level question
Cognitive Level
understand
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