Answer the following questions based on the diagram above. a. Does the diagram a
ID: 1210435 • Letter: A
Question
Answer the following questions based on the diagram above.
a. Does the diagram above describe a case of unsustainable natural monopoly? Explain.
b. Compute profits or losses under the marginal cost pricing option.
c. Write an equation describing a two-part tariff based on the assumption of three hundred and fifty-two (352) customers. The two-part tariff will generate a normal profit for Big Butte, assuming the fixed fee (F) is not exclusionary.
D = AR This diagram describes cost and demand conditions facing Big Butte Power, a regulated monopolist LAC LMC 110,000 KWHsExplanation / Answer
a.
Unsustainable natural monopoly: Where there is no entry barrier but such entry should increase the overall efficiency at higher long-run average cost (LAC). Here, the output level is 110,000. At this level LAC is not the minimum. It is still decreasing beyond the point J. Therefore, this is a case of unsustainable natural monopoly.
b.
Loss = TC – TR
= (110,000 × $0.25) – (110,000 × $0.17)
= 27,500 – 18,700
= $8,800
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