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)

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)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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