The Problem with a Regulatory Authority Forcing a Natural Monopoly

question 45

Multiple Choice

The problem with a regulatory authority forcing a natural monopoly to use marginal cost pricing is that the natural monopoly would

• A)not be capable of supplying all the quantity that buyers would take off the market.
• B)only break even.
• C)earn above-normal profits.
• D)operate at a loss.
• E)price too high.

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Definitions:

Identical Costs

Refers to costs that are the same across different products, services, or processes.

X-Inefficiency

A situation in which a firm fails to utilize its resources efficiently because of a lack of competitive pressure.

Average Total Costs

The total cost of production divided by the quantity produced, representing the per-unit cost of producing a good or service.

Economies Of Scale

Operational scale increases lead to cost efficiencies for businesses, prominently reflecting in reduced production costs per unit as the amount of output grows.