If the Regulator Institutes Average-Cost Pricing in a Natural Monopoly

question 21

Multiple Choice

If the regulator institutes average-cost pricing in a natural monopoly market, then:

• A) the firm makes zero economic profit.
• B) the firm has an incentive to produce at minimum cost.
• C) the marginal benefit to the consumer is less than marginal cost to the firm.
• D) firms in the market will produce at the efficient level.
• E) consumer surplus in the market is maximized.

---

Definitions:

Risk Premium

The extra return expected by an investor for holding a risky asset instead of a risk-free asset, serving as compensation for bearing additional risk.

Arbitrage Opportunity

An arbitrage opportunity is the chance to buy an asset at a low price in one market and sell it at a higher price in another, taking advantage of the price difference for profit.

Expected Return

The anticipated amount of returns an investment is expected to generate, calculated as a weighted average of possible returns, based on their probabilities.

Risk-free Rate

The theoretical return on an investment with zero risk, often represented by the yield on government securities like U.S. Treasury bills.