If the government regulates the price that a natural monopolist can charge to be equal to the firm's average total cost, the firm will
A)earn zero profits.
B)earn positive profits, causing other firms to enter the industry.
C)earn negative profits, causing the firm to exit the industry.
D)minimize costs in order to lower the price that it charges.

Question

Quizplus · Accepted Answer

If the government regulates the price that a natural monopolist can charge to be equal to the firm's average total cost, the firm will not be able to earn any economic profits. This is because the price that the firm is allowed to charge is equal to its cost of production, meaning that any revenue that the firm earns will just cover its costs. Without the ability to earn economic profits, there is little incentive for other firms to enter the industry, since they would also be forced to charge the same price as the incumbent firm.

If the Government Regulates the Price That a Natural Monopolist