Author Question: What is an average cost pricing rule? Why do regulatory agencies use it for natural monopolies? ... (Read 57 times)

nevelica

  • Hero Member
  • *****
  • Posts: 563
What is an average cost pricing rule? Why do regulatory agencies use it for natural monopolies?
 
  What will be an ideal response?

Question 2

Mike is a college student who works part time and earns 100 per week. He spends his entire income on two goods: pepperoni pizzas and bottles of soda. The price of a pepperoni pizza is 10 and the price of a bottle of soda is 2 .
 
  What is the opportunity cost of a pepperoni pizza? What is the opportunity cost of a bottle of soda?



orangecrush

  • Sr. Member
  • ****
  • Posts: 350
Answer to Question 1

Average cost pricing means that the firms will equate their price to their average cost. It is used by regulatory agencies, because if a natural monopoly is forced to charge a perfectly competitive price (using a marginal cost pricing rule), the firm will not be able to cover its costs. No firm can operate on losses, so average cost pricing is considered a second-best solution: it allows the natural monopoly to make zero economic profit but does not allow it to set its price as high as it would were it unregulated.

Answer to Question 2

The opportunity cost of a pepperoni pizza is 5 bottles of soda. The opportunity cost of a bottle of soda is 1/5 of a pepperoni pizza.



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
 

Did you know?

Most childhood vaccines are 90–99% effective in preventing disease. Side effects are rarely serious.

Did you know?

In 2012, nearly 24 milliion Americans, aged 12 and older, had abused an illicit drug, according to the National Institute on Drug Abuse (NIDA).

Did you know?

Autoimmune diseases occur when the immune system destroys its own healthy tissues. When this occurs, white blood cells cannot distinguish between pathogens and normal cells.

Did you know?

Acetaminophen (Tylenol) in overdose can seriously damage the liver. It should never be taken by people who use alcohol heavily; it can result in severe liver damage and even a condition requiring a liver transplant.

Did you know?

It is widely believed that giving a daily oral dose of aspirin to heart attack patients improves their chances of survival because the aspirin blocks the formation of new blood clots.

For a complete list of videos, visit our video library