Consider the firm depicted in the diagram below.

a. Is the firm a natural monopoly? How do you know?
b. Will this firm earn a profit if it is not subject to regulation? How do you know?
c. If the government requires the firm to charge no more than its marginal cost of production, how many units will be sold? At what price? What is the problem with the government capping prices at marginal cost?
d. Suppose the government allows firms to charge no more than their average total costs of production. How many units will this firm sell? At what price? What is the problem with capping prices at average total cost?
e. Evaluate the deadweight loss under each of the three pricing regimes above. Show each regime's deadweight loss as an area on the graph.

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Price (S/output) LMC S25- LATC 7 MR D 0 500 700 1,000 Quantity