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1. Take a look at your electric bill. Currently you pay one charge for the deliv

ID: 1143213 • Letter: 1

Question

1.    Take a look at your electric bill. Currently you pay one charge for the delivery and distribution of your electricity by Comm Ed. Then you pay a second and separate charge   for the amount of electricity you use. You have a choice for this company (or your town has banded together and negotiated a price with a given company or by default you have chosen Comm Ed as the supplier). We consider Comm Ed on the distribution side (all the high voltage towers, wires and meters) a monopoly. Is this a natural monopoly and why?

2.    What are the conditions necessary for a firm to be a monopoly firm?

3.    What is the difference between the demand curve for a perfectly competitive firm as opposed to a monopoly firm?

1. Take a look at your electric bil Currently you pay one charge for the delivery and distribution of your electricity by Comm Ed. Then you pay a second and separate charge for the amount of electricity you use. You have a choice for this company (or your town has banded together and negotiated a price with a given company or by default you have chosen Comm Ed as the supplier). We consider Comm Ed on the distribution side (all the high voltage towers, wires and meters) a monopoly. Is this a natural monopoly and why? 2. What are the conditions necessary for a firm to be a monopoly firm? What is the difference between the demand curve for a perfectly competitive firm as opposed to a monopoly firm 3.

Explanation / Answer

a) Yes, the electricity distribution company is a natural monopoly. The economies of scale provide the electricity company with the monopoly. it is cheaper for one large firm to operate than many other smaller firms in the market. Setting up transmission lines cost huge for any firm.

b) To be a monopoly firm one should be the only service provider in the market of the god which doesn't have any close substitute.

c) A demand curve of a perfectly competitive firm is horizontal. It is perfectly elastic and the demand curve of the monopoly is downward sloping. suggesting that the monopoly has some control over their price. A perfectly elastic firm is a price taker in the market.

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