Under incentive regulation,
A)a firm cannot make a loss.
B)the regulated price is only imperfectly related to average total cost.
C)the firm has an incentive to raise revenue.
D)the regulated price is directly related to average variable cost.
E)if a firm does poorly, it will get regulatory relief.

Question

Quizplus · Accepted Answer

Under incentive regulation, the regulated price is only imperfectly related to average total cost. This means that the firm has an incentive to reduce costs and become more efficient in order to increase profits, as they will not receive a higher price for their product simply because their costs are higher. This also means that the regulated price may not cover all of the firm's costs, so they must strive to keep costs down in order to make a profit.

Under Incentive Regulation