If expected inflation is 12 percent and the publicly regulated electric utility company is legally limited to a 10 percent rate of return, then we should expect
A)increased investment by the utility.
B)expansion of electric power generating capacity.
C)future power shortages.
D)excess investment by the electric utility.

Question

Quizplus · Accepted Answer

The publicly regulated electric utility company is legally limited to a 10 percent rate of return, which means that they cannot adjust prices to keep up with the expected inflation rate of 12 percent. This may lead to a situation where it becomes unprofitable for the company to invest in the expansion of electric power generating capacity or to keep up with maintenance costs, which can result in future power shortages.

If Expected Inflation Is 12 Percent and the Publicly Regulated