Suppose the government imposes fair-returns pricing on a monopolist.This policy creates incentives for the firm to overinvest in capital.As a result,the firm will have ________.

Question

Quizplus · Accepted Answer

Fair-returns pricing guarantees the monopolist a certain rate of return on its investment, which creates an incentive for the firm to overinvest in capital to increase its revenue. As a result, the monopolist will have no incentive to minimize costs of producing a given level of output since it is guaranteed a fair rate of return regardless of its costs. In addition, there is no mention of incentives to innovate or produce new goods in this scenario.

Suppose the Government Imposes Fair-Returns Pricing on a Monopolist