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 90 80 70 60 50 40 30 20 АТС 10 MC MR D 2 6 8 10 12 14 16 18 20 QUANTITY (Thousands of subscriptions) 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. True or False: Over time, the cable company has a very strong incentive to lower costs when subject to average-cost pricing regulations. O True O False PRICE (Dollars per subscription)

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
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Chapter1: Making Economics Decisions
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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
90
80
70
60
50
40
30
20
ATC
10
I MC
MR
D
2
4
6
8
10
12
14
16
18
20
QUANTITY (Thousands of subscriptions)
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.
True or False: Over time, the cable company has a very strong incentive to lower costs when subject to average-cost pricing regulations.
O True
O False
PRICE (Dollars per subscription)
O O
Transcribed Image Text: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 90 80 70 60 50 40 30 20 ATC 10 I MC MR D 2 4 6 8 10 12 14 16 18 20 QUANTITY (Thousands of subscriptions) 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. True or False: Over time, the cable company has a very strong incentive to lower costs when subject to average-cost pricing regulations. O True O False PRICE (Dollars per subscription) O O
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