The main problem with a regulatory commission setting P = ATC is that the regulated firm will
A) experience a loss
B) find its demand curve shifting to the left
C) earn economic profits
D) refuse to make new purchases of capital
E) have little incentive to keep costs down

Question

Quizplus · Accepted Answer

When a regulatory commission sets the price equal to average total cost (P = ATC), the firm is guaranteed to break even on its costs, including a normal profit. This setup removes the firm's incentive to minimize costs because any cost increases can be passed on to consumers through higher prices approved by the regulator, leading to inefficiency and potentially higher costs over time.

The Main Problem with a Regulatory Commission Setting P =