Question

Economic efficiency requires that a natural monopoly's price be: Select one: A. equal to marginal cost where it intersects the demand curve B. equal to the lowest price the firm can charge and still make a normal profit C. equal to average variable cost where it intersects the demand curve D. equal to average total cost where it intersects the demand curve.

Answer 1

Answer: A. equal to marginal cost where it intersects the demand curve

Explanation:

In a pure competition, the market is efficient because it balances demand and supply and gives an equilibrium price that takes both of them into account.

In this market, the price is equal to the marginal revenue of a firm and the profit maximizing level of production is where the marginal revenue intersects the marginal cost.

The efficient level is therefore where price equals marginal cost. The same goes for a natural monopoly. If economic efficiency is to be achieved, the natural monopoly's price must equal the marginal cost at the equilibrium price.