If a regulatory commission imposes upon a nondiscriminating natural monopoly a price that is equal to marginal cost and below average total cost at the resulting output, then
A) the firm will realize an economic profit.
B) the firm will earn only a normal profit.
C) allocative efficiency will be worsened.
D) the firm must be subsidized or it will go bankrupt.

Question

Quizplus · Accepted Answer

If the price is set equal to marginal cost and is below average total cost, the firm will incur losses because it cannot cover its total costs. To continue operating without going bankrupt, the firm would need a subsidy.

If a Regulatory Commission Imposes Upon a Nondiscriminating Natural Monopoly