Question

When regulating a monopoly, a problem(s) with setting price equal to average cost is __________.

a. Loss of profit
b. Reduced output
c. Inefficiency
d. All of the above

Answer 1

Setting price equal to average cost while regulating a monopoly leads to loss of profit, reduced output, and inefficiency, making 'All of the above' the correct answer.

Step-by-step explanation:

The question relates to the potential problems with setting prices equal to the average cost in the context of regulating a monopoly. The correct answer is (d) All of the above because setting the price equal to the average cost can lead to a variety of issues within a regulated monopoly. While it sounds appealing because it mimics what would happen in a perfectly competitive market, in reality, it may cause the firm to lose profit since it eliminates the ability of the firm to cover all of its costs with a normal return on investment.

This can result in reduced output, as the monopoly may not have the incentive to produce more than the break-even quantity. Moreover, it can also lead to inefficiency within the market by preventing the monopolist from maximizing profits, which could potentially result in less innovation and reduced long-term investment in the industry.