-Refer to the diagram above.Assume that the regulator sets price where price equals marginal cost.Then,the government must be prepared to
A) force the monopolist to accept losses.
B) impose a higher tax on the monopolist.
C) subsidize the monopolist.
D) increase consumer surplus.
E) increase production of the good in question.

Question

-Refer to the diagram above.Assume that the regulator sets price where price equals marginal cost.Then,the government must be prepared to
A) force the monopolist to accept losses. 
B) impose a higher tax on the monopolist. 
C) subsidize the monopolist. 
D) increase consumer surplus. 
E) increase production of the good in question.

Quizplus · Accepted Answer

When price is set equal to marginal cost in a natural monopoly, the firm may incur losses because average costs are typically higher than marginal costs. Therefore, the government may need to subsidize the monopolist to cover these losses.

-Refer to the Diagram Above