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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Definitions:

Accounting Profits

The difference between a company's total revenue and its total expenses, excluding taxes and costs not directly related to its core business operations.

Economic Profits

The difference between total revenue and total costs, including both explicit and implicit costs, measuring the performance of a firm beyond its opportunity costs.

Economic Profit

Economic profit is the difference between a firm's total revenue and its total costs, including both explicit and implicit costs, representing the excess over the firm's opportunity costs.

Implicit Costs

The firm’s opportunity costs of using resources owned or provided by the owner.