Under profit regulation or average-cost pricing, the government will raise the price of output whenever a firm's costs increase, and lower the price whenever a firm's costs decrease. Over time, under the average-cost pricing policy, what will the local telephone company most likely do?

Allow its cost to increase

Explanation:

Under Profit regulation or average-cost pricing, the government will require that the firm charge the price at which long-run average cost intersects the demand curve. If the firm lowers its costs, it will notrealize any economic profit because the government will require the firm to lower its price accordingly. If the firm's costs increase, the firm will not suffer economic losses because the government will allow the price to rise accordingly. As a result, the firm faces no incentive to lower costs and no penalty for allowing costs to rise. The firm's costs will likely creep upward over time

Over time, the local Telephone company will most likely permit an increase in their company's cost.

Explanation:

The average cost pricing rule is a pricing strategy that government impose on certain businesses to limit what they are able to charge consumers for its products or services to a price equal to the costs necessary to create the product or service.

This implies that businesses will set the unit price of a product relatively close to the average cost needed to produce it.

Under profit regulation or average-cost pricing, the telephone company's wish to maximize profit can only be effective under the government's regulation if they allow their cost to increase.