8. Natural monopoly analysis The following graph shows the demand (D) for electr

Question

8. Natural monopoly analysis

The following graph shows the demand (D) for electricity services in the imaginary town of Utilityburg. The graph also shows the marginal revenue (MR) curve, the marginal cost (MC) curve, and the average total cost (ATC) curve for the local electricity company, a natural monopolist.

Which of the following statements are true about this natural monopoly? Check all that apply.

- The electricity company must own a scarce resource.

- The electricity company is experiencing economies of scale.

- The electricity company is experiencing diseconomies of scale.

- It is more efficient on the cost side for one producer to exist in this market rather than a large number of producers.

True or False: Without government regulation, natural monopolies always earn zero profit in the long run.

- True

- False

On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity for this natural monopolist 40 36 t 32 Monopoly Outcome 24 ? 20 0 MC 4 MR QUANTITY (Thousands of kilowatt-hours)

Explanation / Answer

(a) Graph is correct. Monopoly outcome is at intersection of MR and MC curves with price of $24 and output 4,000.

(b) Following statements are true:

- The company is experiencing economies of scale (sine ATC curve is continuously downward sloping)

- It is more efficient on the cost side for one producer to exist in this market

(c) FALSE

Natural monopolist earns positive profit in short run and long run as long as it can keep its price higher than ATC.

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