What is a price cap and why might a price cap be a more effective way of regulating natural monopoly than rate of return?
A price cap is a ________ and it is more effective than rate of return regulation when ________.

Question

What is a price cap and why might a price cap be a more effective way of regulating natural monopoly than rate of return? 
 A price cap is a ________ and it is more effective than rate of return regulation when ________.

Accepted Answer

price ceiling; the firm's managers have an incentive to inflate costs

Answer

price floor; the price is set equal to marginal cost

Answer

price ceiling; the firm incurs an economic loss

Answer

price floor; the monopoly has an incentive to use more capital than the efficient quantity

Answer

price floor; the firm's managers have an incentive to inflate costs

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What is a price cap and why might a price cap be a more effective way of regulat...

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