Which of the following statements is (are) TRUE? I. If the government regulates

Question

Which of the following statements is (are) TRUE?

I. If the government regulates the price of a natural monopoly such that price equals marginal cost, the natural monopolist may earn a negative profit.

II. Government regulation of natural monopolies is straightforward because regulators can precisely estimate the demand and cost conditions of regulated firms.

III. Government regulation based on production costs makes firms less likely to reduce costs if lower costs lead to lower regulated prices.

Explanation / Answer

1) If the government regulates the price of a natural monopoly such that price equals marginal cost, the natural monopolist may earn a negative profit....TRUE

Explanation: The natural monopolist may earn losses if price equals marginal cost

2) Government regulation of natural monopolies is straightforward because regulators are able to precisely estimate the demand and cost conditions of regulated firms...FALSE

Explanation: The firm that holds the characteristics of a natural monopoly, an objective definition of cross-subsidization will not be straightforward government regulation

3) Government regulation based on production costs makes firms less likely to lower costs if lower costs lead to lower regulated price..TRUE

Explanation: If the firm is unlikely to cut costs if the lower costs lead to lower regulated price to avoid loss in the profits

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