7. Regulating a natural monopoly Consider the local talephone company, a natural monopoly. The following graph shows the monthly demand curve for phone services, the company's marginal (MR), marginal cost (MC), and average cost (AC) curs RSAR • 2 QUANTITY(arta of autocriptum) Suppose that the government has decided not to regulate this industry, and the fem is free to maximise profits without constraints. M Complete the first row of the following table. You may use the green scratch rectangle (triangle symbols) as well as the black scratch point (plus symbol) on the graph to determine the information necessary to fill in the table. You will not be graded on where you place the rectangle and point on Hint: After placing the point on the graph, you can see the coordinates by clicking and holding the point. After placing the rectangle on the graph you can see the coordinates of the corners by clicking them. You can also see the area of the rectangle by clicking on the interior after placing it on the Pricing Mechanism Profit Maximization Marginal-Cost Pricing Average Cost Pricing Quantity Price (Subscriptions) (Dollars per subscription) Suppose that the government forces the monopolist t Complete the second row of the previous table Suppose that the government forces the monopolist - F Complete the third row of the previous table the p al to marginal cost. Long-Run Decision True or Fender the average-cost pricing policy, the talephone company has no incentive to cut costs.
7. Regulating a natural monopoly Consider the local talephone company, a natural monopoly. The following graph shows the monthly demand curve for phone services, the company's marginal (MR), marginal cost (MC), and average cost (AC) curs RSAR • 2 QUANTITY(arta of autocriptum) Suppose that the government has decided not to regulate this industry, and the fem is free to maximise profits without constraints. M Complete the first row of the following table. You may use the green scratch rectangle (triangle symbols) as well as the black scratch point (plus symbol) on the graph to determine the information necessary to fill in the table. You will not be graded on where you place the rectangle and point on Hint: After placing the point on the graph, you can see the coordinates by clicking and holding the point. After placing the rectangle on the graph you can see the coordinates of the corners by clicking them. You can also see the area of the rectangle by clicking on the interior after placing it on the Pricing Mechanism Profit Maximization Marginal-Cost Pricing Average Cost Pricing Quantity Price (Subscriptions) (Dollars per subscription) Suppose that the government forces the monopolist t Complete the second row of the previous table Suppose that the government forces the monopolist - F Complete the third row of the previous table the p al to marginal cost. Long-Run Decision True or Fender the average-cost pricing policy, the talephone company has no incentive to cut costs.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:7. Regulating a natural monopoly
Consider the local telephone company, a natural monopoly. The following graph shows the monthly demand curve for phone services, the company's
marginal revenue (MR), marginal cost (MC), and average cost (AC) curves.
(opes and se
14
QUANTITY (Thods of subscriptions)
M
Pricing Mechanism
Profit Maximization
Marginal-Cost Pricing
Average-Cost Pricing
Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits without constraints.
D
Complete the first row of the following table. You may use the green scratch rectangle (triangle symbols) as well as the black scratch point (plus
symbol) on the graph to determine the information necessary to fill in the table. You will not be graded on where you place the rectangle and point on
the graph.
Scratch ProLoca
Hint: After placing the point on the graph, you can see the coordinates by clicking and holding the point. After placing the rectangle on the graph you
can see the coordinates of the corners by clicking them. You can also see the area of the rectangle by clicking on the interior after placing it on the
graph.
Complete the second row of the previous table.
Scratch Paint
Short Run
Price
Quantity
(Subscriptions) (Dollars per subscription)
O Fal
Complete the third row of the previous table.
Suppose that the government forces the monopolist to set the price equal to marginal cost.
(?)
Profit
Suppose that the government forces the monopolist to set the price equal to average cost.
Long-Run Decision
True or False: Under the average-cost pricing policy, the telephone company has no incentive to cut costs.
Ⓒ Tru
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