A monopolist under rate of return regulation has an incentive to
A)inflate costs.
B)produce more than the efficient quantity of output.
C)charge a price equal to marginal cost.
D)maximize consumer surplus.
E)maximize shareholder profits

Question

Quizplus · Accepted Answer

Under rate of return regulation, the monopolist is allowed to charge a price that guarantees a specified rate of return on its investment. Therefore, the monopolist has an incentive to inflate costs in order to increase the amount of revenue needed to achieve the target rate of return. By inflating costs, the monopolist can charge a higher price while still meeting the rate of return requirement. The other choices are not consistent with the incentives of a monopolist under rate of return regulation.

A Monopolist Under Rate of Return Regulation Has an Incentive