a) Notice how price regulation (P₁), which helps monopolies become allocative efficient, also pushes the price below the monopoly's ATC resulting negative economic profit (loss). Why would any monopoly choose to continue operation?

b) Profit regulation is to *ensure* the mandated price (P₂) is high enough to cover ATC, giving the monopoly no more, and no less than, a normal profit (i.e. zero economic profit).

In this case the monopoly may find incentive not to be efficient by keeping ATC as low as possible. In fact the monopoly may be encouraged to be inefficient as their ATC is guaranteed to be covered by a high enough mandated price.

P4 P. MC - Price P 2 ATC MR = MC - L - -L MR - D 0 Q4 Q3 Q Q 1 Quantity Output Price Regulation Regulation (marginal cost pricing) Profit Regulation (average cost pricing)