9. Regulating a natural monopoly Consider the local cable company, a natural mon
ID: 1128835 • Letter: 9
Question
9. Regulating a natural monopoly Consider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services and the company's marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves 100 90 80 70 60 50 40 TC 30 20 10 MR 0 2 46 8 10 12 14 16 18 20 QUANTITY (Thousands of subscriptions) Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints Complete the first row of the following table Short Run Price Quantity (Subscriptions) (Dollars per Pricing Mechanism Profit Maximization Marginal-Cost Pricing Average-Cost Pricing subscription Profit Long-Run DecisionExplanation / Answer
(1)
(a) Profit maximization (In this case, Equilibrium is at intersection of MR and MC curves)
Quantity = 6,000
Price = $60
Profit = Positive [Reason: Profit = Quantity x (Price - ATC) and is positive when P > ATC in this case]
Long-run Decision: Stay in business (Since Profit > 0)
(b) Marginal cost pricing (In this case, Equilibrium is at intersection of Demand and MC curves)
Quantity = 12,000
Price = $30
Profit = Negative [Reason: When Q = 12,000, ATC curve lies above Demand curve, so Price < ATC & Profit is negative]
Long-run Decision: Exit the industry (Since Profit < 0)
(c) Average cost pricing (In this case, equilibrium is at intersection of Demand and ATC curves)
Quantity = 11,000
Price = $35
Profit = Zero [Reason: Price = ATC, so Profit is zero]
Long-run Decision: Stay or Exit
(2) TRUE
Under average cost pricing, if firm cuts cost (lowering ATC), government will mandate the firm to price its product equal to the new ATC, therefore profit will remain zero as before. So there is no incentive to lower costs.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.