7. 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'smarginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves.PRICE (Dollars per subscription)1009010002MRD68 10 12 14QUANTITY (Thousands of subscriptions)16ATCMC1820@ 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.Pricing MechanismProfit MaximizationMarginal Cost PricingAverage Cost PricingShort RunPriceQuantity(Subscriptions) (Dollars per subscription)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.ProfitO Allow its costs to increaseUnder profit regulation or average cost pricing, the government will raise the price of output whenever a firm's costs increase and lower the pricewhenever 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 costsLong-Run Decision

A monopoly is a market structure characterized by a single seller or producer dominating the entire…

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. 100 EN 90 00 (?)

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. 100 EN 90 00 (?)

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Question

7. 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.
PRICE (Dollars per subscription)
100
90
10
0
0
2
MR
D
6
8 10 12 14
QUANTITY (Thousands of subscriptions)
16
ATC
MC
18
20
@

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.
Pricing Mechanism
Profit Maximization
Marginal Cost Pricing
Average Cost Pricing
Short Run
Price
Quantity
(Subscriptions) (Dollars per subscription)
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.
Profit
O Allow its costs to increase
Under profit regulation or 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
Long-Run Decision

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