Please explain why A and B are not answers also please elaborate option C.
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At Price= LR Average Cost, firm is earning normal profit which is most suitable for govt.
At P=MC, firm will be in loss, which would have to be subsidized by the government authority. However, in the question, they’re talking about the most suitable option for the govt. which would be Option B.
Price discrimination is when firm charges different prices for different quantity based on how much each customer is WILLING to pay per unit(i.e. different cost for each unit). Govt. would not want any monopoly to charge at first degree price discrimination.