Should it set the price of electricity at marginal cost

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Reference no: EM131505001

Question: Suppose a firm had a natural monopoly in the production of electricity and could impose an annual rental charge at a rate chosen by itself for the use of a meter without which no electricity could be used.

(a) If the firm wished to maximise profits should it set the price of electricity at marginal cost?

(b) Suppose the firm was prevented by law from charging a meter rental charge. Should this affect the profit-maximising price and output of electricity?

Reference no: EM131505001

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