JustMeInc. is the only provider of high speed internet in Tinytown. The firm cha
ID: 2494895 • Letter: J
Question
JustMeInc. is the only provider of high speed internet in Tinytown. The firm charges their customers on an annual basis. Its cost and demand information are given below.
Quantity
(Millions of subscribers)
Price
($ per subscriber)
Total Cost
(million $)
1
300
200
2
260
380
3
233.33
540
4
210
680
5
180
800
6
150
900
7
100
980
8
60
1040
What will the market price would be if the government decides to regulate this natural monopoly by forcing them to sell the quantity and price where the market demand curve crosses average cost?
How many units will be sold at what price if the monopoly is not regulated?
If the internet was regulated to provide the most allocatively efficient quantity of output, what output would it supply and what price would it charge? What subsidy would be necessary to insure this efficient provision of internet services? (Remember: allocative efficiency requires that price equals marginal cost).
Quantity
(Millions of subscribers)
Price
($ per subscriber)
Total Cost
(million $)
1
300
200
2
260
380
3
233.33
540
4
210
680
5
180
800
6
150
900
7
100
980
8
60
1040
Explanation / Answer
Now if demand curve is equal to avareage cost curve then from the table and graph we can see that it happens when quantity is 6 million and price is 150.
In an unregulated market, company will sell to maximize profit which as seen from the table happens when quantity is 4 million and price is 210.
Allocative efficiency means price(demand) = MC which from the table can be seen at price 60 and quantity 8 million outtput. but at this price we see that company suffers 560 million loss so it should get 560 mullion as subsidy to even work at zero profits.
Quantity Price ATC = TC/Q MC TC Revenue Ptofit = Revenue-TC 1 300 200 200 300 100 2 260 190 180 380 520 140 3 233.33 180 160 540 699.99 159.99 4 210 170 140 680 840 160 5 180 160 120 800 900 100 6 150 150 100 900 900 0 7 100 140 80 980 700 -280 8 60 130 60 1040 480 -560Related Questions
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