Define natural monopoly. Describe the two problems that arise when regulators tell a natural monopoly that it must set a price equal to marginal cost.You consume only soda and pizza. One day, the price of soda goes up, the price of pizza goes down, and you are just as happy as you were before the price changes.Illustrate this situation on a graph.How does your consumption of the two goods change? How does your response depend on income and substitution effects?Can you afford the bundle of soda and pizza you consumed before the price changes?Draw the indifference curve for someone deciding how to allocate time between work and leisure. Suppose the wage increases. Is it possible that the person’s consumption would fall? Is this plausible? Discuss.If a consumer does not buy less of a commodity when his income rises, then he will surely buy less when the price of the commodity rises. Explain and illustrate with graph using income effect and substitution effectUnder what conditions will a firm shut down temporarily? Explain. Under what conditions will a firm exit a market? Explain.

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Define natural monopoly. Describe the two problems that arise when regulators tell a natural monopoly that it must set a price equal to marginal cost.
You consume only soda and pizza. One day, the price of soda goes up, the price of pizza goes down, and you are just as happy as you were before the price changes.
1. 1. Illustrate this situation on a graph.
  2. How does your consumption of the two goods change? How does your response depend on income and substitution effects?
  3. Can you afford the bundle of soda and pizza you consumed before the price changes?
Draw the indifference curve for someone deciding how to allocate time between work and leisure. Suppose the wage increases. Is it possible that the person’s consumption would fall? Is this plausible? Discuss.
If a consumer does not buy less of a commodity when his income rises, then he will surely buy less when the price of the commodity rises. Explain and illustrate with graph using income effect and substitution effect
Under what conditions will a firm shut down temporarily? Explain. Under what conditions will a firm exit a market? Explain.

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