Consider a Regulated Natural Monopoly, Such as an Electricity Distribution

question 71

Multiple Choice

Consider a regulated natural monopoly, such as an electricity distribution company, that faces falling long- run average costs. If it is forced to price its output at average cost it will provide

• A) less output than what is socially optimal.
• B) so little output that there will be a shortage.
• C) the socially optimal amount of output.
• D) more output than what is socially optimal.
• E) more output than can be absorbed by the market.

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Definitions:

Fixed Cost

Costs that remain constant in total despite changes in the levels of production or output within a certain range.

Variable Cost

Expenses that vary directly with the level of production or sales volume.

Least-Squares Regression

An analytical technique that identifies the most suitable line by minimizing the sum of the squares of the gaps between the observed and estimated values.

Variable Cost

A cost that changes in proportion to the level of activity or volume of goods produced.