Which of the following statement(s) are true?Group of answer choicesa. Unregulated natural monopoly produces at a socially efficient scale.b. Natural monopoly under average-cost pricing produces at an efficient scalec. Natural monopoly under marginal-cost pricing generates a deadweight loss.b and c are trueNone of the statements are true
Question
Which of the following statement(s) are true?Group of answer choicesa. Unregulated natural monopoly produces at a socially efficient scale.b. Natural monopoly under average-cost pricing produces at an efficient scalec. Natural monopoly under marginal-cost pricing generates a deadweight loss.b and c are trueNone of the statements are true
Solution
The correct answer is "None of the statements are true."
Here's why:
a. An unregulated natural monopoly does not produce at a socially efficient scale. This is because a natural monopoly, left unregulated, will produce where its marginal cost equals its marginal revenue, which is less than the socially efficient scale where price equals marginal cost.
b. A natural monopoly under average-cost pricing does not produce at an efficient scale. This is because average-cost pricing for a natural monopoly results in a price that is higher than the marginal cost, which is not efficient.
c. A natural monopoly under marginal-cost pricing does not generate a deadweight loss. This is because marginal-cost pricing for a natural monopoly results in a price that equals the marginal cost, which is efficient and does not result in a deadweight loss. However, it's important to note that while marginal-cost pricing does not result in a deadweight loss, it may result in losses for the monopoly because price equals marginal cost may be less than average total cost at the quantity produced.
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