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

PRICE (Dollars per subscription)
100
8
80
70
8
8
95
30
20
10
0
0
2
7,65
MR
4 6 8 10 12 14 16
QUANTITY (Thousands of subscriptions)
ATC
MC
18 20
D
(?)

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