If a regulatory agency sets the price equal to marginal cost for a natural monopoly,the
A) government might have to provide a subsidy to the firm to keep it in business.
B) price is the same as the unregulated monopoly price.
C) firm makes an economic profit, though not the maximum economic profit.
D) firm makes the maximum economic profit.
E) firm makes zero economic profit.

Question

Quizplus · Accepted Answer

When a regulatory agency sets the price equal to marginal cost for a natural monopoly, the firm might operate at a loss because its average total cost could be higher than the price at that quantity. Therefore, the government might have to provide a subsidy to keep the firm in business.

If a Regulatory Agency Sets the Price Equal to Marginal