If a regulatory commission imposes upon a nondiscriminating natural monopoly a price that is equal to marginal cost and below average total cost at the resulting output, then
A)the firm will realize an economic profit.
B)the firm will earn only a normal profit.
C)allocative efficiency will be worsened.
D)the firm must be subsidized or it will go bankrupt.

Question

Quizplus · Accepted Answer

Setting a price equal to marginal cost but below average total cost means the firm cannot cover its total costs, leading to losses that could result in bankruptcy without subsidies.

If a Regulatory Commission Imposes Upon a Nondiscriminating Natural Monopoly