options under price(20,28,34,50) options under profit (negative, positive zero)

ID: 1140673 • Letter: O

Question

options under price(20,28,34,50)

options under profit (negative, positive zero)

options under long run decision (exit the industry, stay in the business, stay or exist)

courses.aplia.com Aplia: Student Question My Orders I Chegg.com 10. Regulating a natural monopoly Consider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services and the company's marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves. 90 80 70 60 50 40 30 20 10 MR 0 2 46 8 10 12 14 16 18 20 QUANTITY (Thousands of subscriptions) Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints. 59:08

Explanation / Answer

Pricing Mechanism

Quantity

Price

Profit

Long-run decision

Profit maximisation

6000

Positive

Stay in the business

Marginal-cost pricing

12000

Negative

Exit the industry

Average-cost pricing

10400

Zero

Stay or exit

Profit maximization = TR-TC=(Q*P-Q*C)=(6000*50-6000*34)= $96000

Marginal cost-Pricing= TR-TC= (12000*20-12000*27) = -$84000

Average cost-Pricing = TR-TC=(10400*28-10400*28) = $0

True. At the average cost the price equals cost and hence the profit is zero and there is less incentive to cut costs