a) The aspect of sale of electricity which is susceptible to natural monopoly b) The reason why marginal cost pricing is not a suitable solution for natural monopoly while average cost pricing is c) The average cost pricing that can be implemented Concept Introduction: Natural Monopoly: A natural monopoly refers to a market where there must exist only one seller. In some markets, a single seller is required for efficient production because that one firm can produce the total output at a lower cost than several firms can. If the long-run average cost curve of the monopoly is continuously falling over the entire range of market demand , then it indicates that only one firm can serve the market. Marginal Cost Pricing: A pricing practice by firms where the price is made equal to the marginal cost. Average Cost Pricing: A pricing rule where firms add a mark-up onto the average variable costs to cover the average total cost .

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Chapter 27, Problem 4P

To determine

To explain:

a) The aspect of sale of electricity which is susceptible to natural monopoly

b) The reason why marginal cost pricing is not a suitable solution for natural monopoly while average cost pricing is

c) The average cost pricing that can be implemented

Concept Introduction:

Natural Monopoly: A natural monopoly refers to a market where there must exist only one seller. In some markets, a single seller is required for efficient production because that one firm can produce the total output at a lower cost than several firms can. If the long-run average cost curve of the monopoly is continuously falling over the entire range of market demand, then it indicates that only one firm can serve the market.

Marginal Cost Pricing: A pricing practice by firms where the price is made equal to the marginal cost.

Average Cost Pricing: A pricing rule where firms add a mark-up onto the average variable costs to cover the average total cost.

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