If government regulators guarantee a natural monopolist that it will earn normal profits, then the monopolist will

Question

Quizplus · Accepted Answer

If government regulators guarantee a natural monopolist that it will earn normal profits, then the monopolist will charge a price equal to average total cost. This is because normal profits are considered a cost of production, and if the regulator guarantees that the monopolist will earn those profits, then they can be included in the calculation of average total cost. Therefore, the monopolist can charge a price that covers all of its costs, including normal profits, while still being considered efficient.

If Government Regulators Guarantee a Natural Monopolist That It Will