Microeconomics
13th Edition
ISBN: 9781337617406
Author: Roger A. Arnold
Publisher: Cengage Learning
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Question
Chapter 12, Problem 9QP
To determine
Explain the hypothesis which predicts that the result of regulation is ineffective when it comes to utility rate.
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true or false Government regulation can easily solve all of the problems associated with natural monopolies.
8. Natural monopoly analysis
The following graph gives the demand (D) curve for SG LTE services in the fictional town of Streamship Springs. The graph also shows the marginal
revenue (MR) curve, the marginal cost (MC) curve, and the average total cost (ATC) curve for the local 5G LTE company, a natural monopolist.
On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity for this natural monopolist.
PRICE (Dollars per gigabyte of data)
20
18
16
14
12
10
8
2
0
0
1
MR
2 3
4 5 67
QUANTITY (Gigabyles of data)
8
ATC
MC-
9
10
Monopoly Outcome
Suppose regulators are deciding how the local electric company is allowed to set prices. Demand for
electricity is given by P = 40-Q, where Q is millions of megawatt hours demanded annually. The electric
company is allowed to operate as a monopoly. The marginal cost of the company is $2, while the fixed cost
is $150 million annually.
(a) If the price of the electric company was not regulated, what price would it set? What would be its
profits and the deadweight loss?
(b) Knowing the fixed cost, demand curve, and marginal cost of the utility, the regulator decides to set
a linear price that allows the electric utility to break even. What is this price? What would be the
deadweight loss?
(c) Suppose that demand for electricity varies over the course of the day and is most inelastic in the
middle of the day. Illustrate how the regulator could use this information to improve on the
outcome in (b)? Would there be any challenges that would prevent regulators from using the
prices you…
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Similar questions
- Our textbook discusses two methods of regulating natural monopolies. One of them is price cap regulation. One of the following answers is an example of price cap regulation. Which one? Group of answer choices A government setting the price that a cable company can charge over a period of time by looking at the cable company's accounting costs and then adding a normal rate of profit. A government setting a price level for a public utility several years in advance. When a regulated public utility plays a large role in setting up the regulations that they will follow. When a firm no longer is considered a natural monopoly because of decreased demand.arrow_forwardConsider monopolies such as local water or electric public utilities that are regulated by a government entity, often called a Public Utilities Commission. What are the ways in which these companies are regulated? What are the reasons for granting monopoly power to the company? What are the advantages and disadvantages of doing so? Share your answers to these questions with your colleagues.arrow_forwardAre monopolies economically efficient? Consider the market to the right. Compared to the perfectly competitive outcome, what would be the change in surplus if instead the market had one supplier that was a monopoly? Use the triangle drawing tool to shade in the change in surplus. Properly label this shaded area. Carefully follow the instructions above, and only draw the required objects. Price and cost per unit 40- 36- 32- 28- 24- 20- 16- 12- 8- 4- 0- 4 8 MR D 16 20 24 Quantity 12 28 MC 32 36 40 Qarrow_forward
- Suppose CLP Holdings Limited is a natural monopolist with constant marginal cost. Draw a diagram to indicate the profit-maximizing level of output, the profit-maximizing price, and the size of the profit. If the government wants to increase the market efficiency through price regulation, would you suggest the government setting the price equal to the firm’s marginal cost or its average total cost? Explain in detail with the diagram.arrow_forwarda) In 1938 Congress amended the FTC Act. What additional power did this amendment create? b) What is the economic rationale for consumer protection regulation? c) What issue was addressed by the Robinson-Patman Act?arrow_forwardCompare two methods of monopoly regulation.arrow_forward
- Define monopoly relative to pharmaceutical market power.arrow_forwardWhich of the following statements are true about this natural monopoly? Check all that apply. The 5G LTE company must own a scarce resource. The 5G LTE company is experiencing diseconomies of scale. The 5G LTE company is experiencing economies of scale. It is more efficient on the cost side for one producer to exist in this market rather than a large number of producers. True or False: Without government regulation, natural monopolies never earn zero profit in the long run. O True O Falsearrow_forwardElectricity market in Ankara is monopolistic. The monopoly faces an inverse demand curve of P = 100-2Q. The marginal cost curve is MC =.5Q. What government price ceiling would represent optimal price regulation?arrow_forward
- Monopoly and Price Elasticity Consider the relationship between monopoly pricing and the price elasticity of demand. If demand is inelastic and a monopolist raises its price, quantity would fall by a (LARGER AND SMALLER) percentage than the rise in price, causing profit to (DECREASE OR INCREASE) . Therefore, a monopolist will (ALWAYS, NEVER OR SOMETIMES) produce a quantity at which the demand curve is elastic. Use the purple segment (diamond symbols) to indicate the portion of the demand curve that is inelastic. (Hint: The answer is related to the marginal-revenue (MR) curve.) Then use the black point (plus symbol) to show the quantity and price that maximizes total revenue (TR).arrow_forwardJustify how Dstv has been regarded as an example of a monopoly with the following characteristics of monopolies: 1.Nature of product 2.Entry to the marketarrow_forwardsuppose CLP Holdings Limited is a natural monopolist with constant marginal cost. (1) draw a diagram to indicate the profit-maximizing level of output, the profit maximizing price, and the size of the profit (2) if the government wants to increase the market efficiency through price regulation, would you suggest the government setting the price equal to the firm's marginal cost or its average total cost? explain in detail with diagram in part (1)arrow_forward
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