A. Ross Shepherd correctly reasons that the monopoly firm examined in my original analysis must expand with fixed input prices and that the average cost curve must, therefore, exclude rent to fixed factors. In relaxing this assumption to allow for rising input price (and the payment of full rent), Shepherd introduces the possibility that the output (or revenue) maximizing firm may produce the Pareto optimal output. We should conclude therefore that in the case of single markets under increasing cost the output maximizing monopoly will attain Pareto optimal output if the average cost curve coincides with the competitive supply schedule but will exceed Pareto optimal output if the average cost curve lies below the competitive supply schedule. In the ordinary case we would predict a lower average cost curve because the firm probably can avoid the payment of full rent and may practice various forms of discrimination in factor markets. It would seem that the possibility of rent avoidance is especially significant in the case of regulated industries where effective calculations of opportunity costs are frustrated by legal and regulatory barriers which prevent consideration of alternative uses and by rate base calculations in terms of historical money costs. In the case of publicly-owned utilities this situation may be aggravated by tax exemptions and other concessions. Supported by such institutions the firm may be expected to develop a cost schedule which fails to reflect the full opportunity costs of the resources employed and, if restrained only by the fair return criterion, will be able to expand output beyond Pareto optimal. Shepherd's comment is especially instructive because it brings attention to the fact that the level of the average cost curve is affected by industrial structure. However, since most of these effects will be intramarginal, the marginal cost curve may not be altered significantly and analysis on the traditional assumption of profit-maximization may yield correct price and output predictions. On the other hand, output and price may be affected significantly by the level of the average cost curve in the case of restrained firms. In such cases it becomes necessary to be more explicit about intramarginal factor payments than my original treatment. * Professor of economics, University of Florida.