Natural monopolies are defined by a declining long-run average cost (AC) curve as below. Utilities such as electricity distribution and the train network are natural monopolies. That is, it does not make sense to have two or more distribution networks. It is a waste of resources. We can never reach the bottom of the long-run average cost curve (the minimum efficient scale) even with one provider. However, we still need to regulate natural monopolies or else they will charge the monopoly price (Pm). 1. Indicate on the diagram below the deadweight loss if the monopoly charges Pm- 2. The government has three pricing options in this simple example. First, they could make the monopoly charge P, which is known as Ramsey Pricing. Second, they could charge the competitive price Pc. Third they could provide the utility for free (Po). Discuss the merits of each option using the diagram to consider the implications of each pricing option on deadweight loss and profits. Price Pm g Pr Pc Po a 1 b 1 I MR Qm d Qr Qc I Qo AC MC Quantity

Natural monopolies are defined by a declining long-run average cost (AC) curve as below. Utilities such as electricity distribution and the train network are natural monopolies. That is, it does not make sense to have two or more distribution networks. It is a waste of resources. We can never reach the bottom of the long-run average cost curve (the minimum efficient scale) even with one provider. However, we still need to regulate natural monopolies or else they will charge the monopoly price (Pm). 1. Indicate on the diagram below the deadweight loss if the monopoly charges Pm- 2. The government has three pricing options in this simple example. First, they could make the monopoly charge P, which is known as Ramsey Pricing. Second, they could charge the competitive price Pc. Third they could provide the utility for free (Po). Discuss the merits of each option using the diagram to consider the implications of each pricing option on deadweight loss and profits. Price Pm g Pr Pc Po a 1 b 1 I MR Qm d Qr Qc I Qo AC MC Quantity

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Monopolists, unlike competitive firms, have some market power. A monopolist can increase price, within limits, without the quantity demanded falling to zero. The main way it retains its market power is through barriers to entry-that is, other companies cannot enter the market to create competition in that particular industry. Complete the following table by indicating which barrier to entry appropriately explains why a monopoly exists in each scenario. Barriers to Entry Economies of Scale Scenario In the natural gas industry, low average total costs are obtained only through large-scale production. In other words, the initial cost of setting up all the necessary pipes and hoses makes it risky and, most likely, unprofitable for competitors to enter the market. The Aluminum Company of America (Alcoa) formerly controlled all U.S. sources of bauxite, a key component in the production of aluminum. Given that Alcoa did not sell bauxite to any other companies, Alcoa was a monopolist in the…
Suppose a cable company provides cable service to a small town. The total revenue, marginal revenue, total cost, and marginal cost of providing various quantities of cable subscriptions (units in thousands per month) are presented in the table below. Quantity 0 1 2 3 4 5 6 Price 202 200 198 196 194 192 190 Total Revenue $0 200 396 588 776 960 1140 Assume the local cable company is a monopoly. To maximize profits, the monopoly should produce At that level of output, the cable company will earn economic profits of $ (thousand per month). Marginal Revenue 200 196 192 188 184 180 Total Cost 0 180 270 330 420 660 960 Marginal Cost 180 90 60 90 240 300 (thousand) units. (Enter a numeric response using an integer.)
Justify if each of the following statements is TRUE or FALSE. If the statement is TRUE, just write “True”. If the statement is FALSE, explain why it is wrong. a) Pos Malaysia is the sole firm which provides courier services in Malaysia. It is considered a monopolist in Malaysia. b) Sarawak Energy is the sole supplier of electricity transmission and distribution in Sarawak. It is a monopolist in Sarawak. c) Shell Out is a seafood restaurant with many outlets in Selangor and Kuala Lumpur. It is doing business in the perfectly competitive market.
Question 9 True/False: Natural monopolies occur because they have a declining average cost curve over large outputs relative to the market demand, Group of answer choices True False
Natural monopolies often occur because of huge economies of scale. is this true or false
show complete solution, equation and formula used
true or false Government regulation can easily solve all of the problems associated with natural monopolies.
In this question, I ask you to consider the market for flights from Seattle to Fresno (California). Alaska Airlines have a monopoly on this route. There are two types of travellers. Leisure travellers derive a value of $200 from flying this route if the itinerary includes a Saturday night stay, and $175 if the itinerary doesn’t include a Saturday night stay. Business travellers derive a value of $100 from flying this route if the itinerary includes a Saturday night stay, and $450 if the itinerary doesn’t include a Saturday night stay. What prices do you suggest that Alaska charge for itineraries that include a Saturday night stay, and those that do not include a Saturday night stay?How might business travellers respond to the pricing strategy you suggested?
Discuss monopoly markets and the ethical weaknesses of monopolies.
Why does consumer surplus decline when monopolies are present?
Explain three reasons why monopolies arise.
The figure to the right shows the market demand for electricity and the average total cost and marginal cost of producing electricity for a utility company. Suppose the utility company is a regulated natural monopoly. If government regulators want to achieve economic efficiency, then they will regulate a price of $ per kilowatt hour. (Enter a numeric response using a real number rounded to two decimal places) Now suppose instead that government regulators want to eat the lowest price such that the utility company will not suffer a loss so that it will continue to produce in the long run. If so, then i government regulators will set a price of $ per kilowatt hour. Price and cost (dollars per kilowatt hour) 0.52 048 044- 040- 0.36 0324 0.26 0.24 0.20 0.16 0.12 0.06 004 0.00+ ATC MC 4 8 12 16 20 24 28 32 36 40 44 48 Quantity of kilowatt hours (in billions)