What happen if marginal cost is less than average cost?
Answer:
if you add another unit, average cost will decrease
kinda like if you add a below-average student to a class, the average will drop abit.
MC < AC means the AC curve is downward sloping. If this holds for a wide range of output levels, it may indicate that the producer is a natural monopoly.
If the government were to regulate the natural monopoly, to obtain a more efficient level of output, it has a few options. Since MC pricing would result in a loss for the firm, the regulator may opt for some form of price discrimination, such as a declining block pricing schedule, where the per unit price falls (e.g., first 10 units at $2/each; 11 or more units at $1/each if the MC equals $10). Or the regulator could opt for AC pricing, even though it produces a deadweight loss (which is smaller than the DWL from monopoly pricing).
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