Suppose the Local Government Is Considering Using Marginal Cost Pricing

question 162

Multiple Choice

Suppose the local government is considering using marginal cost pricing to set rates for a cable TV company.Which of the following arguments supports marginal cost pricing?

• A)Marginal cost pricing gives the monopoly an economic profit and a reason to stay in business.
• B)Marginal cost pricing gives the firm a normal economic profit and a reason to stay in business.
• C)Marginal cost pricing results in allocative efficiency.
• D)Unlike firms adopting average cost pricing, firms using marginal cost pricing do not require subsidies, which can be costly.
• E)Unlike average cost pricing, marginal cost pricing enables monopolies to stay in business in the long run.

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Definitions:

Capital Structure

The mixture of debt and equity financing a firm uses to fund its operations and growth.

Flotation Costs

The costs associated with the process of raising new capital through the sale of stocks or bonds to investors, including advisory, legal, and promotional expenses.

Preferred Stock

Preferred stock is a type of stock that confers certain privileges or priorities to its holders, such as fixed dividends and priority over common stock in asset liquidation.

Par Value

The face value of a bond or stock, as stated by the issuing company; it is often a nominal figure that does not necessarily equate to the market value.