Consider a natural monopoly with declining average costs summarized by the equation AC = 16/Q + 1, where AC is in dollars and Q is in millions of units. (The total cost function is C = 16 + Q.) Demand for the natural monopolist’s service is given by the inverse demand equation P = 11 - Q. a. Determine the price and output of the unregulated natural monopolist. b. Suppose a regulator institutes average-cost pricing. What is the appropriate price and quantity? c. Answer part (b) assuming the regulator institutes marginal-cost pricing. What is the enterprise’s deficit per unit of output? How might this deficit be made up?
Consider a natural monopoly with declining average costs summarized by the equation AC = 16/Q + 1, where AC is in dollars and Q is in millions of units. (The total cost function is C = 16 + Q.) Demand for the natural monopolist’s service is given by the inverse demand equation P = 11 - Q. a. Determine the price and output of the unregulated natural monopolist. b. Suppose a regulator institutes average-cost pricing. What is the appropriate price and quantity? c. Answer part (b) assuming the regulator institutes marginal-cost pricing. What is the enterprise’s deficit per unit of output? How might this deficit be made up?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Consider a natural
by the equation AC = 16/Q + 1, where AC is in dollars and Q is in
millions of units. (The total cost function is C = 16 + Q.)
the natural monopolist’s service is given by the inverse demand equation
P = 11 - Q.
a. Determine the
monopolist.
b. Suppose a regulator institutes average-cost pricing. What is the
appropriate price and quantity?
c. Answer part (b) assuming the regulator institutes marginal-cost
pricing. What is the enterprise’s deficit per unit of output? How might
this deficit be made up?
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