Several firms want to be the only horse carriage service in a small tourist town and must pay the city for a license to operate as a monopoly.Competition among the potential firms will result in
A) bidding up the price of the license so that the winning firm makes $0 economic profit.
B) the winning firm making an economic profit because it will be a price maker.
C) the winning firm making an economic profit because it will have no competition.
D) the winning firm making an economic profit because rent seeking cannot occur.
E) a $0 economic profit because monopolies are illegal.

Question

Quizplus · Accepted Answer

Competition among the potential firms will result in bidding up the price of the license so that the winning firm makes $0 economic profit. This is because the firms will compete to pay the highest price for the license, which will increase the cost of operating the business and decrease the potential economic profits. The winning firm will have to charge a higher price to cover their costs, which will deter customers and limit their ability to make an economic profit.

Several Firms Want to Be the Only Horse Carriage Service