Under rate of return regulation, a regulated firm has an incentive to
A) use an efficient amount of capital.
B) set its price equal to its marginal cost.
C) hide losses from bad debts.
D) inflate its costs.

Question

Quizplus · Accepted Answer

Under rate of return regulation, firms are allowed to earn a specified return on their invested capital. This can incentivize firms to inflate their costs to increase their capital base and thus their allowable earnings.

Under Rate of Return Regulation, a Regulated Firm Has an Incentive