ECON MICRO
5th Edition
ISBN: 9781337000536
Author: William A. McEachern
Publisher: Cengage Learning
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Chapter 15, Problem 1.2P
To determine
The market power, and the rationale for government regulations of firms with power.
Concept Introduction:
The relative ability of a company to control the
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(Regulating Natural Monopolies) The following graph representsa natural monopoly.a. Why is this firm considered a natural monopoly?b. If the firm is unregulated, what price and output wouldmaximize its profit? What would be its profit or loss?c. If a regulatory commission establishes a price with thegoal of achieving allocative efficiency, what would bethe price and output? What would be the firm’s profitor loss?d. If a regulatory commission establishes a price with thegoal of allowing the firm a normal profit, what would bethe price and output? What would be the firm’s profitor loss?e. Which one of the prices in parts b, c, and d maximizesconsumer surplus? What problem, if any, occurs at thisprice?
(Regulating Natural Monopolies) The following graph rep-
resents a natural monopoly.
a. Why is this firm considered a natural monopoly?
b. If the firm is unregulated, what price and output would
maximize its profit? What would be its profit or loss?
c. If a regulatory commission establishes a price with the
goal of achieving allocative efficiency, what would be
the price and output? What would be the firm's profit
or loss?
(Monopoly) Suppose that a certain manufacturer has amonopoly on the sorority and fraternity ring business(a constant-cost industry) because it has persuaded the“Greeks” to give it exclusive rights to their insignia.a. Using demand and cost curves, draw a diagram depictingthe firm’s profit-maximizing price and output level.b. Why is marginal revenue less than the price for this firm?c. on your diagram, show the deadweight loss that occursbecause the output level is determined by a monopolyrather than by a competitive market.d. What would happen to price and output if the Greeksdecided to charge the manufacturer a royalty fee of$3 per ring?
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