4. Natural monopoly analysis Aa Aa The following graph shows the demand (D) for

Question

4. Natural monopoly analysis Aa Aa The following graph shows the demand (D) for cable services in a particular town. The graph also shows the marginal revenue (MR) curve, the marginal cost (MC) curve, and the average total cost (ATC) curve for the local cable company, a natural monopolist. PRICE IDollars per subscription] P4 ATC P31 MC MR 01 02 03 QUANTITY [Number of subscriptions] Based solely on the graph, which of the following principal types of barriers to entry is the natural monopoly (the cable company) likely to enjoy? O Ownership of a scarce resource Q A government-created monopoly Costs of production such that a single producer is more efficient than a large number of producers The natural monopolist will maximize economic profit by choosing a price of P3 and a quantity of . Suppose the government sets a regulatory price using the average-cost pricing rule. Under this regulation, the cable company will supply Q3 cable subscriptions . With this price regulation and without a government subsidy, the cable company will Session Timeout shut down in the long run

Explanation / Answer

It is not a government created monopoly because it is not a public utility service which the government has responsibility to distribute among a large section of society. Cable broadcasting is not a scares resource hence the correct option is the third option. This cable company has a lower cost of production so a single producer is more efficient.

Similar to the Monopoly a natural monopoly will also equate marginal revenue and marginal cost. Does the market quantity is Q1 and market price is P3.

Under average cost pricing rule the price will be equal to average cost which means the price will be determined by the interaction of demand curve and average total cost curve. This occurs when the price is P2 and so the corresponding quantity is Q2. The company will continue to operate in the long run because the marginal cost is still lower than the price.

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