When Regulating a Natural Monopoly, Average Cost Pricing Is Usually

question 45

Multiple Choice

When regulating a natural monopoly, average cost pricing is usually used rather than marginal cost pricing because

• A) average cost pricing allows the firm to earn a normal rate of return on investment, while marginal cost pricing leads to economic losses.
• B) average cost pricing is more economically efficient than marginal cost pricing.
• C) average cost pricing leads to lower profits than marginal cost pricing.
• D) average cost pricing leads to a lower market price than marginal cost pricing.

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Definitions:

Salaries Payable

A liability account that represents the amounts owed to employees for work performed but not yet paid.

Cash Amount

The total amount of money, in cash form, that is available or in consideration in a transaction.

Direct Method

A way of reporting cash flows from operating activities in the cash flow statement by listing major classes of gross cash receipts and payments.