The following diagram provides demand and cost curves for a product supplied by a natural monopoly. Use the information in the graph to answer the questions below. P ($ per week) 20 15 10 5 7.5 2 D 5 10 15/65 18 20 AFL-ATL-AVC-35-2-15 F=AFC• Q=1.5x/6.5=24,75 1. This natural monopolist has fixed costs of F = $24.75 0 0 25 30 D ATC MC=AVC Q R=(P-ATC) »Q=(2-35)×18=-27 2. A monopoly that charges a single, profit maximizing price, will earn a profit of π = -27 = 1/2*18 ² 20=185 TC = MC Q = 2×18=36 22²=TR-TC = 18³-36=144 3. A perfect price discriminating monopoly will earn a profit of π = 144 =MU24. If the monopolist introduces a two-part tariff, the profit maximizing strategy would be to charge an access fee of M = $ 62 and a user-fee of P = $ per unit. 5. With a profit maximizing two-part tariff, the monopolist would earn a profit of x = $_ 6. If the government were to impose a price regulation that capped price at marginal cost, the optimal output strategy of the firm would be Q = units, causing the firm to lose L = $_ would force the monopoly to shut down. 7. To avoid shutdown, the government would likely choose to raise their regulated price to equal the firm's average cost so that the firm could break even. An average cost price regulation would cause output to approximately equal Q and the dead-weight loss would be DWL = $ = which
The following diagram provides demand and cost curves for a product supplied by a natural monopoly. Use the information in the graph to answer the questions below. P ($ per week) 20 15 10 5 7.5 2 D 5 10 15/65 18 20 AFL-ATL-AVC-35-2-15 F=AFC• Q=1.5x/6.5=24,75 1. This natural monopolist has fixed costs of F = $24.75 0 0 25 30 D ATC MC=AVC Q R=(P-ATC) »Q=(2-35)×18=-27 2. A monopoly that charges a single, profit maximizing price, will earn a profit of π = -27 = 1/2*18 ² 20=185 TC = MC Q = 2×18=36 22²=TR-TC = 18³-36=144 3. A perfect price discriminating monopoly will earn a profit of π = 144 =MU24. If the monopolist introduces a two-part tariff, the profit maximizing strategy would be to charge an access fee of M = $ 62 and a user-fee of P = $ per unit. 5. With a profit maximizing two-part tariff, the monopolist would earn a profit of x = $_ 6. If the government were to impose a price regulation that capped price at marginal cost, the optimal output strategy of the firm would be Q = units, causing the firm to lose L = $_ would force the monopoly to shut down. 7. To avoid shutdown, the government would likely choose to raise their regulated price to equal the firm's average cost so that the firm could break even. An average cost price regulation would cause output to approximately equal Q and the dead-weight loss would be DWL = $ = which
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The following diagram provides demand and cost curves for a product supplied by a natural monopoly. Use the
information in the graph to answer the questions below.
P
($ per week)
20
15
10
5
7.5
2
D
10
15 6.5 18 20
AFC-ATL-AVC-35-2= 1.5 F=AFC • Q=1.,5x/6.5=24.75
1. This natural monopolist has fixed costs of F = $24.75
0
TR = 1/2 x 18 × 20 = 185
P-ML-24.
0
5
25
30
2
D
ATC
R=(P-ATC) &Q=(2-35)×18=-27
2. A monopoly that charges a single, profit maximizing price, will earn a profit of π = -27
TC=MCQ = 2x 18 =36. PC=TR²-² TC = 18³-36=144
3. A perfect price discriminating monopoly will earn a profit of π = /44
If the monopolist introduces a two-part tariff, the profit maximizing strategy would be to charge an
access fee of M = $ 62
and a user-fee of P = $
per unit.
5.
With a profit maximizing two-part tariff, the monopolist would earn a profit of л = $
6. If the government were to impose a price regulation that capped price at marginal cost, the optimal
output strategy of the firm would be Q=
units, causing the firm to lose L = $
would force the monopoly to shut down.
7. To avoid shutdown, the government would likely choose to raise their regulated price to equal the firm's
average cost so that the firm could break even. An average cost price regulation would cause output to
and the dead-weight loss would be DWL = $
approximately equal Q =_
-
MC=AVC
- Q
which
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Step 1: Define Natural Monopoly
VIEWStep 2: Find the fixed cost
VIEWStep 3: Find the profit when the price is single and profit-maximizing
VIEWStep 4: Find the profit in case of perfect price-discriminating Monopoly
VIEWStep 5: Calculate access fees (M) and user fee (P) in case of two part tariff
VIEWStep 6: Find the profit in case of profit-maximizing two part tariff
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