1. Arrows up or down: At a natural monopolist s current level of output, marginal cost exceeds marginal revenue. The firm should ______ its output and _______ its price.

2. The entry of a second firm shifts the demand curve of the original firm to the _______, so that at each price the original firm will sell a(n) _______ quantity.

3. A natural monopoly occurs when the long-run cost curve lies entirely _______ (above/below) the demand curve of the typical firm in a two-firm market.

4. Under an average-cost pricing policy, the maximum price is shown by the intersection of the _______ curve and the _______ curve.

5. When the British switched from private water supply to public supply, the quality of water _______, consumption per capita _______, and capital cost per unit of output _______.

6. Sirius XM Radio became profitable just barely with about _______ subscribers.

7. Decrease in Cable Demand. Consider a cable TV company that has a fixed cost of $48 million and a marginal cost of $5 per subscriber. The company is regulated with an average-cost pricing policy.

a. The first two columns of the following table show three points on the initial demand curve. For example, at a price of $15 the quantity demanded is six million subscribers. For each $2 reduction in price, the number of subscribers increases by one million. Fill in the blanks in the following table. The regulated price is _______.

b. Suppose the demand for the product decreases, with the demand curve shifting to the left by one million subscribers. Fill in the blanks in the following table. The new regulated price is $ _______.

8. Environmental Costs for Regulated Monopoly. The Bonneville Power Administration (BPA) is a regulated monopoly in the Northwest that uses dozens of hydroelectric dams to generate electricity. Unfortunately, the BPAs dams block the paths of migrating fish, contributing to the decline of several species. Suppose that BPA spends $100 million to make its hydroelectric dams less hazardous for migrating fish. Who will bear the cost of this program?
9. From Private to Public Water Supply. Consider the British experience with water provision. Suppose that an unregulated private monopoly has a price of $3 per unit, a quantity of 10 million units, an average cost of $2 per unit, and a constant marginal cost of $1.
a. Use a graph to show the price, quantity, and average cost as an outcome of profit maximization.
b. Use your graph to show the effects of average-cost regulation on the price, the average cost, and the quantity of output.
10. Satellite Radio Merger. Suppose each of the two satellite radio firms initially has 9.5 million subscribers and generates negative economic profit: Average cost exceeds the $13 price. Assume that the marginal cost is constant at $2 per subscriber.
a. Use a graph to show the average-cost curve and firm-specific demand curve for one of the two satellite firms.
b. Suppose the two firms merge into a single firm. The profit-maximizing price is $13 and the average cost is $12. Illustrate with a graph.

Transcribed Image Text:

Price Subscribers (Millions) Average Cost $15 13 Price $15 13 Subscribers (Millions) Average Cost