Firms operating under cost-plus regulation have an incentive to generate high costs by building huge factories or employing lots of staff,
A) because doing so creates efficiencies and innovation.
B) because the market changes dramatically and they have incentive to meet new demand.
C) because this will reduce the firm's costs more quickly and it can make a high level of profit.
D) because what they can charge is linked to the costs they incur.

Question

Quizplus · Accepted Answer

Under cost-plus regulation, firms can charge prices that are a function of their costs plus a fixed profit margin. Therefore, if their costs are higher, they can charge higher prices, which gives them an incentive to incur higher costs, such as through building large factories or employing many staff. This system can lead to inefficiencies because it reduces the incentive for firms to minimize costs.

Firms Operating Under Cost-Plus Regulation Have an Incentive to Generate