ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Transcribed Image Text:3. Because of the huge fixed cost of running pipes to everyone's home, natural gas is a
natural monopoly. Suppose demand is: Q = 100 - P. Suppose marginal cost is $20, and
the fixed cost of setting up the natural gas pipelines is $1,000.
a) Compute the industry outcome (quantity, price, profit and consumer surplus) under
unregulated monopoly. (Answer: CS = 800 USD)
b) What regulatory price maximizes social welfare? Compute the industry outcome
(quantity, profit and consumer surplus) under this price. Would this policy be
sustainable in the long run? (Hint: the social welfare will be maximized in perfect
competition)
c) Compute the industry outcome with the laxer regulatory policy of constraining price to
be no greater than average cost. Would this policy be sustainable in the long run?
(Answer: Q = 64.5 units)
d) Graph the three different situations of part a, part b, and part c.
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