The Rail System in Metropolis Is a Natural Monopoly

question 117

Multiple Choice

The rail system in Metropolis is a natural monopoly.If the government regulates the system by setting the fare equal to marginal cost, which of the following will be true?

• A)The managers of the rail system will be allowed to adjust marginal cost so that they can get a normal rate of return on capital.
• B)The managers of the rail system will be allowed to adjust marginal cost so that they can get a fair profit.
• C)The rail system will earn economic profit at that fare.
• D)If the government doesn't give the rail system a subsidy to supplement revenue from fares, the system will face continuous economic losses.
• E)If the government doesn't give the rail system a subsidy to supplement revenue from fares, fare increases will push marginal cost upward.

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