Attempts: Do No Harm: /10 Aa Aa 4 Natural monopoly and regulation Consider the l
ID: 1113524 • Letter: A
Question
Attempts: Do No Harm: /10 Aa Aa 4 Natural monopoly and regulation Consider the local cable company, a natural monopoly. The following graph shows the demand curve for cable services, the company's marginal revenue curve (labeled MR), its marginal cost curve (labeled MC), and its average total cost curve (labeled ATC). You can hover over the points on the graph to see their exact coordinates. PRICE Dollars per month 100 90 80 70 60 50 40 30 0- 10 Demand ATC MC MR 0 12 18 24 30 36 4248 546 QUANTITY (Thousands of households per manthl Assume no government regulation. I the natural monopoly provides the profit-maximizing output, it wil provide cable services to households per month at a price of and earn a profit of per month.Explanation / Answer
Monopolist will produce where MR =MC . So it produces cable service Q = 25000 houses and price = $35.
Profit = TR – TC. Profit = (35*25000) – ( 18*25000) = $425000.
Monopolist will produce where demand = MC. At this point monopolist will provide service to 51000 houses at a price of $10.
Under this pricing policy firm will experience loss
Profit = TR –TC <0
Firm will produce where demand cuts ATC. It provides service to 46000 households at price equal 14. Profit = 0 per month (Profit = (14-14)*46000)
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