The figure below shows revenue and cost curves of a natural monopoly firm.Figure 14.1

In the figure,
D: Demand curve
MR: Marginal revenue curve
MC: Marginal cost curve
ATC: Average total cost curve
-To avoid driving a natural monopolist into bankruptcy, regulatory commissions:
A)allow the monopolist to enjoy an economic profit.
B)do not allow the monopolist to make an accounting profit.
C)subsidize the monopolist to help it break even.
D)allow the monopolist to earn a fair rate of return.
E)allow the monopolist to temporarily shut down.

Question

The figure below shows revenue and cost curves of a natural monopoly firm.Figure 14.1
​
  In the figure,
D: Demand curve
MR: Marginal revenue curve
MC: Marginal cost curve
ATC: Average total cost curve
-To avoid driving a natural monopolist into bankruptcy, regulatory commissions:
A)allow the monopolist to enjoy an economic profit. 
B)do not allow the monopolist to make an accounting profit. 
C)subsidize the monopolist to help it break even. 
D)allow the monopolist to earn a fair rate of return. 
E)allow the monopolist to temporarily shut down.

Quizplus · Accepted Answer

Regulatory commissions allow a natural monopolist to earn a fair rate of return. This is because natural monopolies typically have high fixed costs that can only be spread over a large number of units of output, making it difficult for other firms to compete in the market. Allowing the monopolist to earn a fair rate of return incentivizes them to continue operating and providing the good or service to consumers, while still ensuring that they do not make excessive profits at the expense of consumers.

The Figure Below Shows Revenue and Cost Curves of a Natural