If a cost-plus regulated firm is allowed to count purchases of new personal computers in its rate base,but is not allowed to count computer hardware purchases to upgrade existing computers,one would expect to see the regulated firm
A) upgrading its existing computers.
B) upgrade half of its computers and replace half.
C) replacing its computers very quickly.
D) under-utilizing new computers.
E) over-utilizing upgraded computers.

Question

Quizplus · Accepted Answer

The firm is incentivized to replace computers quickly because only new purchases can be included in the rate base, allowing them to increase their allowable earnings.

If a Cost-Plus Regulated Firm Is Allowed to Count Purchases