A policy of average-cost pricing will intially ______ price for a natural monopoly, but as costs increase, price will _______.
A. increase; not change
B. decrease; increase
C. decrease; not change
D. increase; decrease
To answer this question, we need to understand what average-cost pricing means for a natural monopoly.
Average-cost pricing is a pricing strategy where a monopolistic firm sets its price equal to the average cost of production. This means that the price charged for a product or service reflects the average cost per unit produced.
Now, let's consider the two parts of the question:
1. Initially, what will happen to the price for a natural monopoly under average-cost pricing?
The initial price for a natural monopoly under average-cost pricing will be set equal to the average cost of production. Therefore, the price will not be affected. So, the initial answer is "not change" (Option C: decrease; not change).
2. As costs increase, what will happen to the price under average-cost pricing?
If the costs of production for a natural monopoly increase, the average cost of production will also increase. Since average-cost pricing sets the price equal to the average cost, the price charged by the natural monopoly will also increase. Therefore, the final answer is "increase" (Option D: increase; decrease).
In conclusion, the correct answer is:
D. increase; decrease