5. Regulating a natural monopoly Aa Aa Consider the local cable company, a natur

Question

5. Regulating a natural monopoly Aa Aa 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) 200 180 160 140 120 100 80 60 40 20 Demand ATC MC MR 6 12 18 24 30 36 42 48 54 60 QUANTITY (Thousands of households per monthl Assume no government regulation. If the natural monopoly provides the profit-maximizing output, it will provide cable 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 cable services to a price of households per month at Under the marginal-cost pricing regulation, the firm will experience: O A profit of zero O A positive economic profit An economic loss

Explanation / Answer

1. 25,000 households

2. $ 70

3. Profit = 25,000 x (70 - 38) = 800,000

4. 51,000 households

5. $ 20

6. An economic loss because ATC is greater than MC

7. 46,000 households

8. $ 30

9. Profit = 46,000 x (30 - 20) = 46000 x 10 = 460,000

10. True

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