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If a regulated monopolist has a loss when the government forces it to price at its marginal cost: a
If a regulated monopolist has a loss when the government forces it to price at its marginal cost:
a. the government should subsidize the firm
b. the firm should exit the industry
c. the firm should minimize its losses
d. the government should take over the business
Expert Solution
The correct option is (a).
Here, it is given that the government regulates the monopoly market which causes the monopolist to incur losses as the government wants monopolists to give the product at its marginal cost to the potential buyers. Hence, the monopolist is not willing to sell his product at this market price; therefore, the government should subsidize the monopoly firm so that the losses of the monopolist can be covered.
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