What is one problem with regulating a monopolist on the basis of cost i.e. allow

Question

What is one problem with regulating a monopolist on the basis of cost i.e. allowing the monopolist to charge a price equal to its average total cost? A.  A monopolist is still able to generate excessive economic profits. B.  It does not provide an incentive for the monopolist to reduce its cost. C.  Regulators are unable to control prices and/or production effectively. D.  A monopolist's costs, by definition, are higher than costs of perfectly competitive firms. What is one problem with regulating a monopolist on the basis of cost i.e. allowing the monopolist to charge a price equal to its average total cost? A.  A monopolist is still able to generate excessive economic profits. B.  It does not provide an incentive for the monopolist to reduce its cost. C.  Regulators are unable to control prices and/or production effectively. D.  A monopolist's costs, by definition, are higher than costs of perfectly competitive firms.

Explanation / Answer

Solution: it does not provide an incentive for the monopolist to reduce its cost.

Explanation: When monopolist charges a price equal to its average total cost it will earn normal profit thus does not provide an incentive for the monopolist to reduce its cost.

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