Consider the case of a natural monopoly with falling average total costs. If regulation sets the price equal to marginal cost, then
A) the firm would earn economic profits.
B) the outcome would be allocatively inefficient.
C) shortages would result.
D) the firm would operate at a loss and eventually go out of business.
E) the demand curve would shift to the left.

Question

Quizplus · Accepted Answer

When price is set equal to marginal cost in a natural monopoly with falling average total costs, the firm would operate at a loss because the price would be below average total cost.

Consider the Case of a Natural Monopoly with Falling Average