natural monopaly Consider the local cable company, a natural monopoly. The follo

Question

natural monopaly Consider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services, the company's marginal-revenue (MR), marginal-cost (MC), and average-total-cost (ATC) curves. 80 0 2 48 112 14 16 18 20 Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints. Complete the first row of the folowing table. Profit Maximieation Marginal-Cost Pricing Average-Gest Picing- Suppose that the government forces the monopolist to set the price equal to marginal cost. Complete the second row of the previous table Suppose that the government forces the monopolist to set the price equal to average total cost. Complete the third row of the previous table. True or False: Over time, the cable company has a very strong incentive to lower costs when subject to average-cost pricing regulations.

Explanation / Answer

Pricing Mechanism Quantity Price Profit Long-Run Decision Profit- Maximization 8 50 240 continue to produce Marginal-Cost Pricing 16 10 -80 Exit Average cost pricing 15 15 0 continue to produce Under Profirt maximization Equilibrium condition is MR=MC. Under Marginal Cost pricing Equilibrium condition is Price =MC Under Average cost pricing Equilibrium quantity is Price = AC. False, because profit will not increase due to regulation it will only add to investment expenditure.

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