18. Consider the firm depicted in the diagram below: The government is consideri

Question

18. Consider the firm depicted in the diagram below:



The government is considering two methods of regulation.
Regulation Method 1: The government requires the firm to charge no more than its marginal cost of production.
Regulation Method 2: The government allows firms to charge no more than their average total cost of production.
Which of the following statements is correct? A. Deadweight loss (DWL) is greater in Method 1, and consumer surplus is larger with this method. B. Deadweight loss is greater in Method 1, but Method 2 requires subsidization or the firm will go out of business. C. Deadweight loss is greater in Method 2, but Method 1 requires subsidization or the firm will go out of business. D. Deadweight loss is greater in Method 2, and consumer surplus is larger with this method.

Explanation / Answer

D. Deadweight loss is greater in Method 2, and consumer surplus is larger with this method.

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