10. Regulating a natural monopoly Consider the local telephone company, a natural monopoly. The following graph...

  

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10. Regulating a natural monopoly Consider the local telephone company, a natural monopoly. The following graph shows the demand curve for phone services, the company's marginal revenue curve (labeled MR), its marginal cost curve (labeled MC), and its average total cost curve (labeled AC). (Hint: Click a point on the graph to see its exact coordinates.) 160 140 120 PRICE (Dollars per month) Š 100 80 60 20 0 AC 2 MC 1 3 5 6 7 4 QUANTITY (Thousands of households per month) D 8 ? Assume no government regulation. If the natural monopoly provides the profit-maximizing output, it will provide phone services to households per month at a price of $ and earn a profit of $ per month. Suppose that the government forces the monopolist to set the price equal to marginal cost. In the short run, under a marginal-cost pricing regulation, the monopolist will provide phone services to households per month at a price of $ If the government forces the natural monopoly to set its price equal to marginal cost, how will the company react in the long run? Because the firm suffers an economic loss under marginal-cost pricing, it will reduce its output to 3,500 households per month in the long run. Because the firm suffers an economic loss under marginal-cost pricing, it will exit the industry in the long run. Because the firm earns a profit under marginal-cost pricing, it will remain in the industry in the long run. Suppose that the government forces the natural monopoly to set its price equal to average cost. Under an average-cost pricing policy, the monopolist would provide phone services to households per month at a price of $ and earn a profit of $ per month. Under average-cost pricing, the government will raise the price of output whenever a firm's costs increase and lower the price whenever a firm's costs decrease. Over time, under the average-cost pricing policy, the local telephone company will most likely: Not work to decrease its costs Work to decrease its costs 10. Regulating a natural monopoly Consider the local telephone company, a natural monopoly. The following graph shows the demand curve for phone services, the company's marginal revenue curve (labeled MR), its marginal cost curve (labeled MC), and its average total cost curve (labeled AC). (Hint: Click a point on the graph to see its exact coordinates.) 160 140 120 PRICE (Dollars per month) Š 100 80 60 20 0 AC 2 MC 1 3 5 6 7 4 QUANTITY (Thousands of households per month) D 8 ? Assume no government regulation. If the natural monopoly provides the profit-maximizing output, it will provide phone services to households per month at a price of $ and earn a profit of $ per month. Suppose that the government forces the monopolist to set the price equal to marginal cost. In the short run, under a marginal-cost pricing regulation, the monopolist will provide phone services to households per month at a price of $ If the government forces the natural monopoly to set its price equal to marginal cost, how will the company react in the long run? Because the firm suffers an economic loss under marginal-cost pricing, it will reduce its output to 3,500 households per month in the long run. Because the firm suffers an economic loss under marginal-cost pricing, it will exit the industry in the long run. Because the firm earns a profit under marginal-cost pricing, it will remain in the industry in the long run. Suppose that the government forces the natural monopoly to set its price equal to average cost. Under an average-cost pricing policy, the monopolist would provide phone services to households per month at a price of $ and earn a profit of $ per month. Under average-cost pricing, the government will raise the price of output whenever a firm's costs increase and lower the price whenever a firm's costs decrease. Over time, under the average-cost pricing policy, the local telephone company will most likely: Not work to decrease its costs Work to decrease its costs

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1 In the absence of government regulation a natural monopolist fix a quantity where MCMR and charge ... View the full answer