Which of the following statements is (are) TRUE?
I. If the government regulates the price of a natural monopoly such that price equals marginal cost, the natural monopolist may earn a negative profit.
II. Government regulation of natural monopolies is straightforward because regulators can precisely estimate the demand and cost conditions of regulated firms.
III. Government regulation based on production costs makes firms less likely to reduce costs if lower costs lead to lower regulated prices.

Question

Quizplus · Accepted Answer

I. True, because setting price equal to marginal cost in a natural monopoly, where average cost is typically decreasing, can result in prices that do not cover average costs, leading to negative profits.III. True, because if regulated prices are directly tied to production costs, firms have less incentive to minimize costs since any reduction in costs would simply lead to a reduction in the regulated price, thus not benefiting the firm's profitability.

Which of the Following Statements Is (Are) TRUE