The rail system in Metropolis is a natural monopoly.If the government regulates the system by setting the fare equal to marginal cost, which of the following will be true?
A)Profit will be zero under regulation.
B)Only normal profit will be earned under regulation.
C)Accounting profit will be zero under regulation.
D)Economic loss will occur under regulation.
E)Profit will be higher than if the monopoly were unregulated.

Question

Quizplus · Accepted Answer

Setting the fare equal to marginal cost in a natural monopoly typically results in economic loss because the average cost is higher than the marginal cost, leading to insufficient revenue to cover total costs.

The Rail System in Metropolis Is a Natural Monopoly