If a regulatory agency sets the price equal to marginal cost for a natural monopoly, the
A) government might have to provide a subsidy to the firm to keep it in business.
B) firm makes zero economic profit.
C) firm makes an economic profit, though not the maximum economic profit.
D) firm makes the maximum economic profit.
E) price is the same as the unregulated monopoly price.

Question

Quizplus · Accepted Answer

When a regulatory agency sets the price equal to marginal cost for a natural monopoly, the firm might operate at a loss because its average total cost is higher than the marginal cost at the output level where marginal cost equals demand. To keep the firm in business and ensure the provision of the service, the government might have to provide a subsidy.

If a Regulatory Agency Sets the Price Equal to Marginal