Question

"A natural monopoly regulated with a marginal cost pricing rule results in:

A. an economic profit for the regulated firm.
B. a normal profit for the regulated firm.
C. a deadweight loss.
D. an economic?"

Answer 1

A natural monopoly regulated with a marginal cost pricing rule results in a deadweight loss.

Step-by-step explanation:

A natural monopoly regulated with a marginal cost pricing rule results in a deadweight loss.

A natural monopoly arises when a single firm can supply the entire market demand at lower costs than multiple firms. In this case, regulating the monopoly with a marginal cost pricing rule means setting the price equal to the firm's marginal cost. However, because the firm has market power as a monopoly, it will produce at a quantity where its marginal cost is lower than the marginal benefit to consumers, resulting in a deadweight loss.

For example, in the given figure, when the firm is required to produce a quantity of 6 and charge a price of 6.5, it will suffer losses. This indicates a deadweight loss due to the monopoly restricting output and charging a higher price than the efficient market price.