Consider a natural monopoly that has declining LRAC over the entire range of the market demand curve.If it is regulated and required to charge a price that is equal to MC,the resulting level of output is
A)allocatively efficient,and profit is earned.
B)allocatively efficient,but the firm must be paid a subsidy or it will eventually go out of business.
C)less than the allocatively efficient level,and profit is zero.
D)less than the allocatively efficient level,but losses occur.
E)greater than the allocatively efficient level,but losses occur.

Question

Quizplus · Accepted Answer

When a natural monopoly is required to charge a price equal to marginal cost (MC), it achieves allocative efficiency. However, because the long-run average cost (LRAC) is declining, the price at MC is below LRAC, leading to losses unless subsidized.

Consider a Natural Monopoly That Has Declining LRAC Over the Entire