A regulated monopoly is likely to suffer losses when
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Question

A regulated monopoly is likely to suffer losses when 
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______.

BlackTom AI · Accepted Answer

To tackle this question, let's first lay out the scenario and the options clearly.
Option 1: 'price is set to achieve productive efficiency' — This statement suggests pricing to cover average costs in a way that minimizes output costs. While P = AC pricing can lead toward productive efficiency in some contexts, it does not specify marginal considerations and is not the standard description of a regulated monopoly's loss outcome, so it is not the best match here.
Option 2: 'price is set to marginal cost (P = MC)' — This is the key candidate. For a regulated monopoly forced to charge a price equal to marginal cost, the price typically falls below average total cost (ATC) when there are fixed costs and diminishing returns. Because ATC exceeds MC, the firm incurs losses. Therefore, this option directly explains why losses occur under P = MC regulation.
Option 3: 'it produces where marginal revenue equals marginal cost' — This is the profit-maximizing condition for an unregulated monopoly, not for a regulated monopoly constrained to P = MC. In that restricted pricing, MR does not generally determine output in the same way, so this option describes a different scenario.
Option 4: 'price is set to achieve the most efficient allocation of resources' — While P = MC can reflect an allocation that is efficient in a welfare sense, the statement is broad and does not address the monetary outcome (losses) that arise when ATC > MC. It also conflates efficiency with profitability, which is not the core point here.
In sum, the statement that directly explains why a regulated monopoly would incur losses is that the price is set to marginal cost (P = MC), since fixed costs mean ATC exceeds MC and the firm loses money under this pricing rule.

A regulated monopoly is likely to suffer losses when Blank ______.

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