Problem2 The table below depicts the cost and demand structure a natural monopol

Question

Problem2 The table below depicts the cost and demand structure a natural monopoly faces. Total Average Marginal Total Marginal Total Proft Price Quantty ($ per unlt)Cost Cost Revenues Revenue 92 95 90 255 80 480 a. Calculate LR average cost, LR marginal cost, total revenues, marginal revenue, and total profit at each output level (complete the table). b. If this firm is allowed to operate as a monopolist, what will be the quantity produced and the price charged by the firm? [Hint: identified the total profit at the point where MR MC] ? lfregulators require the firm to practice marginal cost pricing (price cannot be higher than marginal cost). What is the firm's profit (loss) under this regulatory framework? (Hint: identified the total profit at the point where price marginal cost) d. If regulators require the firm to practice average cost pricing, what is the firm's profit under this regulatory framework? (Hint: identified the total profit at the point where price average cost) e. Based on your analysis, what should regulators due? (Le., what practice should regulators allow? Let the firm operate as a monopolist? Require the firm to practice marginal cost pricing? Require the firm to practice average cost pricing?). Please explain.

Explanation / Answer

ANSWER:

1)

long run average cost = long run total cost / quantity

long run marginal cost = change in long run total cost / change in quantity

total revenue = price * quantity

marginal revenue = change in total revenue / change in quantity

profit = total revenue - total cost

2) total profit at mr = mc is at 2 units and the profit is 3.

3) total profit at p = mc is at 5 units and the loss is -31.

4) total profit at p = ac is at 3 units and the profit is 0.

5) the regulators should allow the firm to operate like a monopolist as the maximum profit is when mr = mc.

QUANTITY PRICE LONG RUN COST LONG RUN AVERAGE COST LONG RUN MARGINAL COST TOTAL REVENUE MARGINAL REVENUE TOTAL PROFIT 0 100 0 - - 0 - 0 1 95 92 92 92 95 95 3 2 90 177 88.5 85 180 85 3 3 85 255 85 78 255 75 0 4 80 331 82.75 76 320 65 -11 5 75 406 81.2 75 375 55 -31 6 70 480 80 74 420 45 -60

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