Problem 3. Suppose a company has a fixed cost of 20 and a marginal cost that is constant at 2. The demand curve is P=24-Q. Explain why this is a natural monopoly. Contrast regulation that sets the price at marginal cost with regulation that sets it at average cost. How do the outputs and surpluses differ? Calculate the DWL under average cost pricing. Illustrate outputs, prices, and DWL in a diagram.

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A:

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