Consider a Natural Monopoly That Is Producing an Output Level

question 112

Multiple Choice

Consider a natural monopoly that is producing an output level such that it is experiencing decreasing returns to scale.If government policy requires the firm to set price equal to marginal cost,

• A)the outcome will be allocatively efficient and the firm will be earning profits.
• B)the outcome will be allocatively inefficient and the firm will be earning profits.
• C)the outcome will be allocatively efficient and the firm will be incurring losses.
• D)the outcome will be allocatively inefficient and the firm will be incurring losses.
• E)the outcome will be allocatively efficient and the firm will be earning zero profits.

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Definitions:

Journal Entries

The records of financial transactions in the double-entry bookkeeping system, where each transaction is noted in two accounts (debit and credit).

Transactions

Financial events that affect the assets, liabilities, and equity of a company recorded in its accounting system.

Conversion Costs

The combined costs of direct labor and manufacturing overheads required to convert raw materials into finished goods.

Equivalent Units

A concept in cost accounting used to allocate costs to partially completed goods, converting them into the amount of finished goods units.