3a) MONOPOLY REGULATION. Suppose that you had a monopoly on water which has a MC=$1 per litre and an initial fixed cost of $50 to set up. Explain using the graph below, how you would choose to set price and output, and what the approximate price and quantity would be. $12 $10 $8 $6 $4 $2 demand $0 0 50 100 150 200 250 300 350 litres 70 b) Illustrate the Consumer Surplus, Producer Surplus, AND Deadweight loss of the monopoly market and explain whether the market is efficient. c) Explain and illustrate the price, quantity and marginal value if the government chooses to regulate the monopoly by setting a socially optimal price. Explain whether this is efficient.

What is a natural monopoly?

From the graph you drew to answer Exercise 11.6, would you say this transit system is a natural monopoly? Justify. Use the following information to answer the next three questions. In the years before wireless phones, when telephone technology requited having a wile matting to every home, it seemed plausible that telephone service had diminishing average costs and might require regulation like a natural monopoly. For most of the twentieth century, the national U.S. phone company was AT&T, and the company functioned as a regulated monopoly. Think about the deregulation of the U.S. telecommunications industry that has occurred over the last few decades. (This is not a research assignment, but a thought assignment based on what you have learned in this chapter.)

What is the usual shape of a marginal revenue cuwe for a monopolist? Why?