Assume no government regulation. If the natural monopoly provides the profit-maximizing output, it will provide phone services to households per month at a price of $ and earn a profit of $ per month. Suppose that the government forces the monopolist to set the price equal to marginal cost. In the short run, under a marginal-cost pricing regulation, the monopolist will provide phone services to households per month at a price of $ If the government forces the natural monopoly to set its price equal to marginal cost, how will the company react in the long run? Because the firm suffers an economic loss under marginal-cost pricing, it will reduce its output to 3,500 households per month in the long run. Because the firm earns a profit under marginal-cost pricing, it will remain in the industry in the long run. Because the firm suffers an economic loss under marginal-cost pricing, it will exit the industry in the long run. Suppose that the government forces the natural monopoly to set its price equal to average cost. Under an average-cost pricing policy, the monopolist would provide phone services to households per month at a price of $ and earn a profit of $ per month. 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, the local telephone company will most likely: Work to decrease its costs Not work to decrease its costs Consider the local telephone company, a natural monopoly. The following graph shows the demand curve for phone services, the company's marginal revenue curve (labeled MR), its marginal cost curve (labeled MC), and its average total cost curve (labeled AC). (Hint: Click a point on the graph to see its exact coordinates.) PRICE (Dollars per month) 160 140 120 100 80 60 40 20 0 0 1 MR 2 3 4 567 QUANTITY (Thousands of households per month) AC MC D 8 (?)
Assume no government regulation. If the natural monopoly provides the profit-maximizing output, it will provide phone services to households per month at a price of $ and earn a profit of $ per month. Suppose that the government forces the monopolist to set the price equal to marginal cost. In the short run, under a marginal-cost pricing regulation, the monopolist will provide phone services to households per month at a price of $ If the government forces the natural monopoly to set its price equal to marginal cost, how will the company react in the long run? Because the firm suffers an economic loss under marginal-cost pricing, it will reduce its output to 3,500 households per month in the long run. Because the firm earns a profit under marginal-cost pricing, it will remain in the industry in the long run. Because the firm suffers an economic loss under marginal-cost pricing, it will exit the industry in the long run. Suppose that the government forces the natural monopoly to set its price equal to average cost. Under an average-cost pricing policy, the monopolist would provide phone services to households per month at a price of $ and earn a profit of $ per month. 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, the local telephone company will most likely: Work to decrease its costs Not work to decrease its costs Consider the local telephone company, a natural monopoly. The following graph shows the demand curve for phone services, the company's marginal revenue curve (labeled MR), its marginal cost curve (labeled MC), and its average total cost curve (labeled AC). (Hint: Click a point on the graph to see its exact coordinates.) PRICE (Dollars per month) 160 140 120 100 80 60 40 20 0 0 1 MR 2 3 4 567 QUANTITY (Thousands of households per month) AC MC D 8 (?)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Assume no government regulation. If the natural monopoly provides the profit-maximizing output, it will provide phone services to
households per month at a price of $
and earn a profit of $
per month.
Suppose that the government forces the monopolist to set the price equal to marginal cost. In the short run, under a marginal-cost pricing regulation,
the monopolist will provide phone services to
households per month at a price of $
If the government forces the natural monopoly to set its price equal to marginal cost, how will the company react in the long run?
Because the firm suffers an economic loss under marginal-cost pricing, it will reduce its output to 3,500 households per month in the
long run.
Because the firm earns a profit under marginal-cost pricing, it will remain in the industry in the long run.
Because the firm suffers an economic loss under marginal-cost pricing, it will exit the industry in the long run.
Suppose that the government forces the natural monopoly to set its price equal to average cost. Under an average-cost pricing policy, the monopolist
would provide phone services to
households per month at a price of $
and earn a profit of $
per month.
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, the local telephone company will most likely:
Work to decrease its costs
Not work to decrease its costs
Transcribed Image Text:Consider the local telephone company, a natural monopoly. The following graph shows the demand curve for phone services, the company's marginal
revenue curve (labeled MR), its marginal cost curve (labeled MC), and its average total cost curve (labeled AC). (Hint: Click a point on the graph to
see its exact coordinates.)
PRICE (Dollars per month)
160
140
120
100
80
60
40
20
0
0
1
MR
2
3
4
567
QUANTITY (Thousands of households per month)
AC
MC
D
8
(?)
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