Compared to an unregulated firm,a cost-plus regulated firm has a smaller incentive to pursue cost-saving innovations because
A) few cost-saving innovations exist for natural monopolies.
B) the reduction in costs never improve profitability.
C) the regulators refuse to allow the firm to adopt the innovation.
D) regulated firms do not seek to maximize profits.
E) the reduction in costs ultimately results in a reduction in the regulated price.

Question

Quizplus · Accepted Answer

In a cost-plus regulated firm, the regulated price is based on the firm's costs plus an allowed rate of return. Therefore, any reduction in costs will result in a reduction in the regulated price, which will reduce the firm's profits. As a result, the incentive for the firm to pursue cost-saving innovations is smaller compared to an unregulated firm where cost savings directly improve profitability.

Compared to an Unregulated Firm,a Cost-Plus Regulated Firm Has a Smaller