Question

To avoid subsidies, the government should cap the price for a natural monopoly at its:________ a) average total cost. b) fixed cost. c) marginal cost. d) average variable cost.

Answer 1

Answer:

a) average total cost

Explanation:

In the case when the subsidies are avoided and the government wants to cap the price for the natural monopoly so it should be at average total cost. Because the government have to compensate the loss in the case when the government force the monopolies to generate at that time when the marginal cost is equal to Price so at this case the government should keep the proces at an average total cost equal to price so no loss and no subsidy is there

Hence, the correct option is a.