An incentive-regulated firm can mislead the regulator by
A)saying that its marginal cost is lower than it actually is, in order to get a higher price.
B)asking to charge the marginal cost price.
C)hiring the best lawyers to lobby the regulator.
D)saying that its average total cost is higher than it actually is, in order to get a higher price.
E)asking to charge the average cost price.

Question

Quizplus · Accepted Answer

Misleading the regulator by claiming higher average total costs can lead the regulator to allow the firm to charge a higher price, under the assumption that the firm needs to cover these costs to operate efficiently. This is a strategy to increase profits by securing a higher price approval from the regulator.

An Incentive-Regulated Firm Can Mislead the Regulator by