Question

Suppose a regulatory commission is established to regulate the monopolist's pricing. Which of the following statements is true?

1) The regulatory commission will set a price equal to the monopolist's marginal cost.
2) The regulatory commission will set a price equal to the monopolist's average total cost.
3) The regulatory commission will set a price equal to the monopolist's average variable cost.
4) The regulatory commission will set a price equal to the monopolist's average fixed cost.

Answer 1

The true statement in the context of a regulatory commission regulating a monopolist's pricing is that:
2) The regulatory commission will set a price equal to the monopolist's average total cost.

Step-by-step explanation:

This pricing strategy is commonly known as average cost pricing. The regulatory commission sets prices at a level that covers both variable and fixed costs, ensuring that the monopolist does not engage in monopolistic practices such as price gouging. By setting prices in this manner, the commission aims to strike a balance between protecting consumers from excessive prices and enabling the monopolist to cover its costs while earning a reasonable return on investment.

Setting prices equal to average total cost helps prevent monopolists from exploiting their market power to charge exorbitant prices and ensures that essential goods or services remain accessible to the public. It also encourages efficiency and cost control within the monopolistic firm, as they must operate efficiently to maintain profitability under this pricing regulation.

Therefore, the correct option is: 2) The regulatory commission will set a price equal to the monopolist's average total cost.