9. Regulating a natural monopolyConsider the only electric company in a small town, which you can assume operates as a natural monopoly. The following graph shows the demand curve for electricity services per month, as well as the provider’s marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. Suppose the government has elected not to impose regulations on the industry, and so the firm faces no regulatory constraints in maximizing profits.Complete the first row of the following table.Suppose the government has elected not to impose regulations on the industry, and so the firm faces no regulatory constraints in maximizing profits.Complete the first row of the following table.Pricing MechanismShort RunLong-Run DecisionQuantityPriceProfit(Subscriptions)(Dollars per subscription)Profit Maximization Marginal-Cost Pricing Average-Cost Pricing uppose now that the government decides to require the monopolist to set its price equal to marginal cost.Complete the second row of the previous table.Suppose now that the government decides to require the monopolist to set its 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 electric company most likely do? A. Allow its costs to increase B. Work to decrease its costs ### Economic Graph Analysis: Demand and Cost CurvesThe graph presented is a detailed illustration of the relationship between price, quantity, and various economic cost metrics for a hypothetical market. It is a valuable tool for understanding how changes in quantity affect pricing and costs in a subscription model.**Axes:**- **Horizontal Axis (X-axis):** Represents the quantity of subscriptions (in thousands).- **Vertical Axis (Y-axis):** Represents the price in dollars per subscription.**Curves and Lines:**1. **Demand Curve (D):** - Represented by the blue line with a negative slope, indicating that as the price decreases, the quantity demanded increases. 2. **Marginal Revenue Curve (MR):** - Shown by the black line, also with a negative slope. This curve lies below the demand curve, illustrating that the marginal revenue decreases faster than the price.3. **Average Total Cost (ATC) Curve:** - Displayed as a green line, which initially decreases, then slightly increases, showing the U-shape that is typical of average cost curves.4. **Marginal Cost (MC) Curve:** - Depicted as an orange dashed line, representing the cost of producing one additional unit. It intersects the ATC at its lowest point, indicating the most efficient scale of production.**Key Points on the Graph:**- **Intersection Points:** - Several gray dashed lines and star markers highlight intersection points between different curves. These are typically evaluated to determine optimal pricing and production levels. - **Labeled Point (7, 65):** - This point on the graph indicates a specific quantity (7,000 subscriptions) and price ($65 per subscription). It highlights a potential equilibrium or optimal pricing point from a business perspective.**Analysis:**- The intersections of the MR and MC determine the profit-maximizing level of output.- The ATC curve’s position relative to the price affects the profitability, with the distance between the price and ATC representing potential profit per unit.This graph effectively demonstrates fundamental economic principles in microeconomics, especially in a monopolistic or competitive market scenario where firms aim to maximize profits by balancing revenue and costs.

Under a monopoly, a single seller faces the entire market demand on his own. Here, the seller…

9. Regulating a natural monopoly Consider the only electric company in a small town, which you can assume operates as a natural monopoly. The following graph shows the demand curve for electricity services per month, as well as the provider’s marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. Suppose the government has elected not to impose regulations on the industry, and so the firm faces no regulatory constraints in maximizing profits. Complete the first row of the following table. Suppose the government has elected not to impose regulations on the industry, and so the firm faces no regulatory constraints in maximizing profits. Complete the first row of the following table. Pricing Mechanism Short Run Long-Run Decision Quantity Price Profit (Subscriptions) (Dollars per subscription) Profit Maximization Marginal-Cost Pricing Average-Cost Pricing uppose now that the government decides to require the monopolist to set its price equal to marginal cost. Complete the second row of the previous table. Suppose now that the government decides to require the monopolist to set its 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 electric company most likely do? A. Allow its costs to increase B. Work to decrease its costs

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 only electric company in a small town, which you can assume operates as a natural monopoly. The following graph shows the demand curve for electricity services per month, as well as the provider’s marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve.

Suppose the government has elected not to impose regulations on the industry, and so the firm faces no regulatory constraints in maximizing profits.

Complete the first row of the following table.

Suppose the government has elected not to impose regulations on the industry, and so the firm faces no regulatory constraints in maximizing profits.

Complete the first row of the following table.

Pricing Mechanism	Short Run	Long-Run Decision
Quantity	Price	Profit
(Subscriptions)	(Dollars per subscription)
Profit Maximization
Marginal-Cost Pricing
Average-Cost Pricing

uppose now that the government decides to require the monopolist to set its price equal to marginal cost.

Complete the second row of the previous table.

Suppose now that the government decides to require the monopolist to set its 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 electric company most likely do?

A. Allow its costs to increase

B. Work to decrease its costs

### Economic Graph Analysis: Demand and Cost Curves

The graph presented is a detailed illustration of the relationship between price, quantity, and various economic cost metrics for a hypothetical market. It is a valuable tool for understanding how changes in quantity affect pricing and costs in a subscription model.

**Axes:**
- **Horizontal Axis (X-axis):** Represents the quantity of subscriptions (in thousands).
- **Vertical Axis (Y-axis):** Represents the price in dollars per subscription.

**Curves and Lines:**

1. **Demand Curve (D):**
- Represented by the blue line with a negative slope, indicating that as the price decreases, the quantity demanded increases.

2. **Marginal Revenue Curve (MR):**
- Shown by the black line, also with a negative slope. This curve lies below the demand curve, illustrating that the marginal revenue decreases faster than the price.

3. **Average Total Cost (ATC) Curve:**
- Displayed as a green line, which initially decreases, then slightly increases, showing the U-shape that is typical of average cost curves.

4. **Marginal Cost (MC) Curve:**
- Depicted as an orange dashed line, representing the cost of producing one additional unit. It intersects the ATC at its lowest point, indicating the most efficient scale of production.

**Key Points on the Graph:**

- **Intersection Points:**
- Several gray dashed lines and star markers highlight intersection points between different curves. These are typically evaluated to determine optimal pricing and production levels.

- **Labeled Point (7, 65):**
- This point on the graph indicates a specific quantity (7,000 subscriptions) and price ($65 per subscription). It highlights a potential equilibrium or optimal pricing point from a business perspective.

**Analysis:**

- The intersections of the MR and MC determine the profit-maximizing level of output.
- The ATC curve’s position relative to the price affects the profitability, with the distance between the price and ATC representing potential profit per unit.

This graph effectively demonstrates fundamental economic principles in microeconomics, especially in a monopolistic or competitive market scenario where firms aim to maximize profits by balancing revenue and costs.

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