Compared to the profit-maximizing equilibrium of a natural monopoly, a price cap regulation ________ price and ________ output.
A) raises; decreases
B) lowers; increases
C) raises; increases
D) lowers; decreases

Question

Quizplus · Accepted Answer

In a natural monopoly, the profit-maximizing price is set at a level above marginal cost, resulting in a lower output level than would be socially optimal. When a price cap regulation is imposed, it limits the price that the natural monopoly can charge, potentially leading the natural monopoly to produce at a level where marginal cost equals the price cap. This would result in a lower price and higher output level than under the profit-maximizing equilibrium, thus answering with option B.

Compared to the Profit-Maximizing Equilibrium of a Natural Monopoly, a Price