The government of your state wants Gigantic Software Corp., which is a natural monopoly, to stay in business yet still produce where price equals marginal cost.The government might choose to
A)set a price ceiling 10 percent lower than its previous level
B)impose a tax on the company for each dollar of sales
C)establish regulations that raise the company's cost of doing business
D)provide a subsidy to the company to cover the loss and ensure a normal profit
E)replace the company's top management

Question

Quizplus · Accepted Answer

Providing a subsidy to the company to cover the loss and ensure a normal profit would be the best option to keep the company in business while still producing at the efficient level where price equals marginal cost. This would also prevent the need for a price ceiling, a tax on sales, or regulations that raise the company's costs. Replacing the company's management would not necessarily solve the issue of producing at the efficient level.

The Government of Your State Wants Gigantic Software Corp