-In the above figure, if the natural monopoly is regulated using an average cost pricing rule, but the firm can pad its costs and make the regulator believe its costs are LRAC (inflated), then the price the firm charges will increase from
A) $18 to $24.
B) $12 to $24.
C) $12 to $18.
D) $18 to $36.

Question

-In the above figure, if the natural monopoly is regulated using an average cost pricing rule, but the firm can pad its costs and make the regulator believe its costs are LRAC (inflated), then the price the firm charges will increase from
A) $18 to $24. 
B) $12 to $24. 
C) $12 to $18. 
D) $18 to $36.

Quizplus · Accepted Answer

If the firm inflates its costs to make the regulator believe its costs are higher, the average cost pricing rule will allow the firm to charge a higher price to cover these inflated costs. Thus, the price will increase from $18 to $24.

-In the Above Figure, If the Natural Monopoly Is Regulated