9. Regulating a natural monopolyConsider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services and the company’s marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves. Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints.Complete the first row of the following table.Short RunQuantityPricePricing Mechanism(Subscriptions)(Dollars per subscription)ProfitLong-Run DecisionProfit MaximizationMarginal-Cost PricingAverage-Cost PricingSuppose that the government forces the monopolist to set the price equal to marginal cost.Complete the second row of the previous table.Suppose that the government forces the monopolist to set the price equal to average total cost.Complete the third row of the previous table.Under 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 costsdecrease. Over time, under the average-cost pricing policy, what will the local cable company most likely do?O Work to decrease its costsO Allow its costs to increase Consider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services and the company'smarginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves.1009080706, 5060504030ATCMC2010MRD2468101214161820QUANTITY (Thousands of subscriptions)PRICE (Dollars per subscription)

Natural monopoly will boost profits by delivering at the amount where marginal revenue (MR)…

Answered: 9. Regulating a natural monopoly…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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9. Regulating a natural monopoly

Consider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services and the company’s marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves.

Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints.
Complete the first row of the following table.
Short Run
Quantity
Price
Pricing Mechanism
(Subscriptions)
(Dollars per subscription)
Profit
Long-Run Decision
Profit Maximization
Marginal-Cost Pricing
Average-Cost Pricing
Suppose that the government forces the monopolist to set the price equal to marginal cost.
Complete the second row of the previous table.
Suppose that the government forces the monopolist to set the price equal to average total cost.
Complete the third row of the previous table.
Under 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 cable company most likely do?
O Work to decrease its costs
O Allow its costs to increase

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