Consider the natural monopoly shown in Figure 15.7. Assume that the government regulatory agency sets the regulated price, PR, at the level of average total cost at which the demand curve intersects the ATC curve. If the firm knows that it will always be able to charge a price equal to its average total cost, does it have an incentive to reduce its average cost? Briefly explain.

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Price and MR Demand cost Monopoly price PM MC Regulated price ATC PR Loss Efficient PE price Quantity QM OR QE