Price (dollars per unit) 30 24 21 18 16 12 O 4 $12 to $18. $18 to $24. $12 to $18. a $12 to $24. 8 MR b 12 LRAC (inflated) LRAC MC In the above figure, if the natural monopoly is regulated using an average cost pricing rule, but the firm can pad its costs and make the regulator believe its costs are LRAC (inflated), then the price the firm charges will increase from D₁ 20 16 Quantity (millions)

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Price (dollars per unit)
30
24
21
18
16
12
O
4
$12 to $18.
$18 to $24.
$12 to $18.
a
$12 to $24.
8
MR
b
12
LRAC (inflated)
LRAC
MC
In the above figure, if the natural monopoly is regulated using an average cost pricing rule, but the firm can pad its costs and make
the regulator believe its costs are LRAC (inflated), then the price the firm charges will increase from
D₁
20
16
Quantity (millions)
Transcribed Image Text:Price (dollars per unit) 30 24 21 18 16 12 O 4 $12 to $18. $18 to $24. $12 to $18. a $12 to $24. 8 MR b 12 LRAC (inflated) LRAC MC In the above figure, if the natural monopoly is regulated using an average cost pricing rule, but the firm can pad its costs and make the regulator believe its costs are LRAC (inflated), then the price the firm charges will increase from D₁ 20 16 Quantity (millions)
Expert Solution
Step 1

A natural monopoly is a single firm in an industry which can produce the goods at lowest cost. 

The long run average cost curve faced by a natural monopoly firm is downward sloping. 

 

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