-A regulated firm may have an incentive to spend an inefficiently high amount on capital when:
A)it becomes deregulated.
B)fair rate of return regulation is used.
C)regulators set price equal to marginal cost.
D)it is part of a monopolistically competitive industry.
E)it is allowed to charge a monopoly price.

Question

-A regulated firm may have an incentive to spend an inefficiently high amount on capital when:
A)it becomes deregulated. 
B)fair rate of return regulation is used. 
C)regulators set price equal to marginal cost. 
D)it is part of a monopolistically competitive industry. 
E)it is allowed to charge a monopoly price.

Quizplus · Accepted Answer

Fair rate of return regulation allows a firm to earn a specified rate of return on its capital investments. This can incentivize the firm to overinvest in capital to increase its base for calculating the allowed return, leading to inefficiencies.

-A Regulated Firm May Have an Incentive to Spend an Inefficiently