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Profit Maximization Under Natural Monopoly

Natural monopoly with decreasing average total cost can still make profit by equating marginal revenue with marginal cost while achieving economic efficiency through price discrimination.

Glossary:

  • profit maximization
    In the short run with fixed costs, a firm maximizes economic profit by equating marginal revenue (MR) with marginal variable cost (MC) when MC is increasing. Marginal revenue is lower than price (i.e., MR < P) if the firm must lower the price for all units just to sell one more unit.

Topics:

Profit maximization

Keywords

ATC, average total cost, marginal cost, marginal revenue, MC, MR, natural monopoly, price discrimination, profit maximization, regulation, single pricing, total revenue, total willingness to pay, TWP