If government regulation sets the maximum price for a natural monopoly equal to its marginal cost, then the natural monopolist will
A)earn economic losses.
B)earn economic profits.
C)earn zero economic profits.
D)produce a lower quantity of output than is socially optimal.

Question

Quizplus · Accepted Answer

When a government sets the maximum price for a natural monopoly equal to its marginal cost, the monopolist will likely earn economic losses because natural monopolies have decreasing average total costs over relevant output ranges. Setting price equal to marginal cost can result in prices that do not cover average total costs, leading to losses.

If Government Regulation Sets the Maximum Price for a Natural