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 (Dollars per subscription) P4 ATC P3 P11 . MC 01 02 03 QUANTITY INumber 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 Costs of production such that a single producer is more efficient than a large number of producers O Ownership of a scarce resource O A government-created monopoly The natural monopolist will maximize economic profit by choosing a price of and a quantity of If the government wants to pursue efficiency, it should set the price for cable subscriptions at . With this ment suheidy the cable comnan

Explanation / Answer

4. Natural monopoly analysis:

• (iii) Government-created monopoly.

The natural monopolist will maximize profit by choosing a price of P3 and a quantity of Q1.

If the government wants to pursue efficiency, it should set the price for cable subscription at P2. With this price regulation and without a government subsidy, the cable company will earn normal profits in the long-run.

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