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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Describe the two problems that arise when regulators tell a natural monopoly that it must set a price equal to marginal cost.

To determine
The problem that arises when the regulators regulate monopoly firms to equalize the price to marginal cost.

Explanation

When the regulators regulate a natural monopoly by setting the price equal to marginal cost, it causes two problems. The first problem is that the monopoly firm may incur a loss because the price will not able to recover the average fixed cost as the marginal cost is always lesser than the average total cost This...

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