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12. Regulation of a Natural Monopoly For a decreasing-cost industry natural monopoly (LRAC negatively sloped), one firm can supply the market at a lower total cost than can two or more firms. Regulators may regulate the price charged by the firm rather than force it to break up. In this exercise, you will find output, price, profit, and consumer surplus for a utility (say, an electricity provider) under three different pricing rules. The market demand equation is: P = 50 – 0.1Q The long run total cost equation is: TC = 3000 + 10Q a. Write the marginal revenue, marginal cost, and average cost equations. Confirm that the average cost curve is negatively sloped. MR = MC = AC = Slope of AC = dAC/dQ = b. GRAPH the demand, marginal revenue, marginal cost, and average cost curves. 100 200 300 400 500

12. Regulation of a Natural Monopoly For a decreasing-cost industry natural monopoly (LRAC negatively sloped), one firm can supply the market at a lower total cost than can two or more firms. Regulators may regulate the price charged by the firm rather than force it to break up. In this exercise, you will find output, price, profit, and consumer surplus for a utility (say, an electricity provider) under three different pricing rules. The market demand equation is: P = 50 – 0.1Q The long run total cost equation is: TC = 3000 + 10Q a. Write the marginal revenue, marginal cost, and average cost equations. Confirm that the average cost curve is negatively sloped. MR = MC = AC = Slope of AC = dAC/dQ = b. GRAPH the demand, marginal revenue, marginal cost, and average cost curves. 100 200 300 400 500

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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21 12. Regulation of a Natural Monopoly For a decreasing-cost industry natural monopoly (LRAC negatively sloped), one firm can supply the market at a lower total cost than can two or more firms. Regulators may regulate the price charged by the firm rather than force it to break up. In this exercise, you will find output, price, profit, and consumer surplus for a utility (say, an electricity provider) under three different pricing rules. The market demand equation is: P = 50 – 0.1Q The long run total cost equation is: TC = 3000 + 10Q a. Write the marginal revenue, marginal cost, and average cost equations. Confirm that the average cost curve is negatively sloped. MR = MC = AC = Slope of AC = dAC/dQ = b. GRAPH the demand, marginal revenue, marginal cost, and average cost curves. 100 200 300 400 500
Transcribed Image Text:21 12. Regulation of a Natural Monopoly For a decreasing-cost industry natural monopoly (LRAC negatively sloped), one firm can supply the market at a lower total cost than can two or more firms. Regulators may regulate the price charged by the firm rather than force it to break up. In this exercise, you will find output, price, profit, and consumer surplus for a utility (say, an electricity provider) under three different pricing rules. The market demand equation is: P = 50 – 0.1Q The long run total cost equation is: TC = 3000 + 10Q a. Write the marginal revenue, marginal cost, and average cost equations. Confirm that the average cost curve is negatively sloped. MR = MC = AC = Slope of AC = dAC/dQ = b. GRAPH the demand, marginal revenue, marginal cost, and average cost curves. 100 200 300 400 500
22 C. Suppose that price is set to maximize profit (MC = MR). Find output, price, average cost, and profit. Also find consumer surplus and the deadweight loss. Q* = p* = AC* = n* = CS = DWL = d. Suppose, instead, that government rate-of-return regulation requires average-cost pricing. Price is set so that the utility serves as many customers as possible without incurring a loss (P = AC). Find output, price, average cost, and profit. (You will need to use the quadratic equation.) P* = AC* = n* =
Transcribed Image Text:22 C. Suppose that price is set to maximize profit (MC = MR). Find output, price, average cost, and profit. Also find consumer surplus and the deadweight loss. Q* = p* = AC* = n* = CS = DWL = d. Suppose, instead, that government rate-of-return regulation requires average-cost pricing. Price is set so that the utility serves as many customers as possible without incurring a loss (P = AC). Find output, price, average cost, and profit. (You will need to use the quadratic equation.) P* = AC* = n* =
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