Regulating a natural monopolyConsider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services, the company's marginal-revenue (MR), marginal cost (MC), and average-total-cost (ATC) curves. PLEASE CHECK THE IMAGES 100908070605040ATCMC3010MR0.+0.2.46.8.101214161820QUANTITY (Thousands of subscriptions)PRICE (Dollars per subscription)20 Short RunQuantityPricePricing Mechanism(Subscriptions)(Dollars per subscription)ProfitLong-Run DecisionProfit Maximization13,000Positive65Stay in businessMarginal-Cost PricingAverage-Cost PricingSuppose 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.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 costsdecrease. Over time, under the average-cost pricing policy, what will the local cable company most likely do?Allow its costs to increaseWork to decrease its costs

Natural monopolist exist for the industry in which fixed cost is vey high and the variable cost is…

Answered: Short Run Quantity Price Pricing…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Regulating a natural monopoly

Consider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services, the company's marginal-revenue (MR), marginal cost (MC), and average-total-cost (ATC) curves.

PLEASE CHECK THE IMAGES

100
90
80
70
60
50
40
ATC
MC
30
10
MR
0.
+
0.
2.
4
6.
8.
10
12
14
16
18
20
QUANTITY (Thousands of subscriptions)
PRICE (Dollars per subscription)
20

Short Run
Quantity
Price
Pricing Mechanism
(Subscriptions)
(Dollars per subscription)
Profit
Long-Run Decision
Profit Maximization
13,000
Positive
65
Stay in business
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.
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, what will the local cable company most likely do?
Allow its costs to increase
Work to decrease its costs

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