CFA Practice Question

CFA Practice Question

The most likely objective of government regulation of a natural monopoly is to ______
A. provide incentives for potential competitors to enter the market.
B. reduce the product price to the supplier's average cost per unit of output.
C. reduce the product price to the supplier's marginal cost per unit of output.
Explanation: Ideally, price regulation of a natural monopoly would improve resource allocation if price was set equal to the firm's average total cost per unit of output. The resulting output level would produce zero economic profits for the firm. If price was set equal to marginal cost, however, economic losses would occur and the monopolist would not undertake production.

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