2.18 You are a manager of a natural monopoly with the costs and demand illustrated in the figure. 1. What is the minimum efficient scale of production? 2. If you are free to maximize profit, what price do you set, and what quantity do you produce? What is your economic profit or loss? 3. Suppose that a new firm enters the market and produces one-fourth of your production. What is the firm's average cost? If you do not change your price, is the new firm likely to make an economic profit or incur an economic loss? Explain your answers. vega-pxe-frame nd cost (cents per kilowatt hour) 20¢ 18¢ 16¢ 14¢ 12¢ 10¢ LMC LAC 8¢ 6¢ D 4¢ 2¢ 0 5 1 MR 10 15 20 25 30 35 Quantity (billions of kilowatt hours per year) T

2.18 You are a manager of a natural monopoly with the costs and demand illustrated in the figure. 1. What is the minimum efficient scale of production? 2. If you are free to maximize profit, what price do you set, and what quantity do you produce? What is your economic profit or loss? 3. Suppose that a new firm enters the market and produces one-fourth of your production. What is the firm's average cost? If you do not change your price, is the new firm likely to make an economic profit or incur an economic loss? Explain your answers. vega-pxe-frame nd cost (cents per kilowatt hour) 20¢ 18¢ 16¢ 14¢ 12¢ 10¢ LMC LAC 8¢ 6¢ D 4¢ 2¢ 0 5 1 MR 10 15 20 25 30 35 Quantity (billions of kilowatt hours per year) T

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Solve all questions compulsory..

2.18 You are a manager of a natural monopoly with the costs and demand
illustrated in the figure.
1. What is the minimum efficient scale of production?
2. If you are free to maximize profit, what price do you set, and what
quantity do you produce? What is your economic profit or loss?
3. Suppose that a new firm enters the market and produces one-fourth
of your production. What is the firm's average cost? If you do not
change your price, is the new firm likely to make an economic profit
or incur an economic loss? Explain your answers.
vega-pxe-framed cost (cents
per kilowatt hour)
20¢
18¢
16¢
14¢
12¢
10¢
LMC
LAC
8¢
6¢
D
4¢
2¢
MR
0
5
10 15 20 25 30 35
Quantity (billions of kilowatt
hours per year)

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Step 1: Define Monopoly.

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Step 2: Calculate minimum efficient scale of production.

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Step 3: Calculate profit-maximization price, quantity, and economic profit or loss.

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Step 4: Calculate new firm's average cost, and new firm's economic profit or loss.

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