Question: consider a natural monopoly with declining average costs summarized by the equation AC = 16/Q + 1, where AC is in dollars and Q is

consider a natural monopoly with declining average costs summarized by the equation AC = 16/Q + 1, where AC is in dollars and Q is in millions of units. (the total cost function is C = 16 + Q). Demand for the natural monopolist's service is given by the inverse demand equation P = 11 - Q.

a. determine the price and output of the unregulated natural monopolist.

b. Suppose a regulator institutes average cost pricing. What is the appropriate price and quantity?

c. Answer part (b) assuming the regulator institutes marginal cost pricing. What is the enterprise's deficit per unit of output? How might this deficit be made up?

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