Chapter 77, Problem 1FRQ

a)

To determine

The correctly labeled graph shows a natural monopoly and labels price, and quantity that will choose if unregulated as P_U and Q_U, respectively.

Explanation of Solution

The graph will show the data as follows:

  

Price is represented in the vertical axis of the graph and quantity is shown on the horizontal axis of the graph. Here, the average total cost curve is in a downward slope whereas the marginal cost curve is also in a downward slope but it is below the ATC curve.

The unregulated Q_U is represented at the point of Q_U on the horizontal axis where MC and MR are equal and the unregulated P_U is found above Q_U at the vertical axis on a demand curve which is in a downward slope.

Economics Concept Introduction

Introduction: A natural monopoly is a market structure that occurred when the start-up cost is high or there is a high administrative cost and the need for powerful economies of scale to conduct the business.

b)

To determine

The consumer surplus and firm’s profit when the regulation is absent by shading on the graph.

Explanation of Solution

The graph will show the data as follows:

  

0 Q_U

Price is represented in the vertical axis of the graph and quantity is shown on the horizontal axis of the graph. Here, the average total cost curve is in a downward slope whereas the marginal cost curve is also in a downward slope but it is below the ATC curve.

The unregulated Q_U is represented at the point of Q_U on the horizontal axis where MC and MR are equal and the unregulated PU is found above Q_U at the vertical axis on a demand curve which is in a downward slope.

Consumer surplus without regulation is shown as a triangular shaded area of grey color which is below the demand curve but above the price. The profit of the firm without regulation is found as a correct rectangular shaded area in blue color.

Economics Concept Introduction

Introduction: A natural monopoly is a market structure that occurred when the start-up cost is high or there is high administrative cost and the need for powerful economies of scale to conduct the business.

c)

To determine

The lowest price that regulators could expect the monopoly to maintain in the long run as P_R and Quantity as Q_R

Explanation of Solution

The graph will show the data as follows:

  

Price is represented in the vertical axis of the graph and quantity is shown on the horizontal axis of the graph. Here, the average total cost curve is in a downward slope whereas the marginal cost curve is also in a downward slope but it is below the ATC curve.

The unregulated Q_U is represented at the point of Q_U on the horizontal axis where MC and MR are equal and the unregulated P_U is found above Q_U at the vertical axis on a demand curve which is in a downward slope.

Consumer surplus without regulation is shown as a triangular shaded area of grey color which is below the demand curve but above the price. The profit of the firm without regulation is found as a correct rectangular shaded area in blue color.

The regulated price which can maintain in the long run is shown on the vertical axis by denoting P_R and the regulated quantity is shown on the horizontal axis by denoting Q_R.

Economics Concept Introduction

Introduction: A natural monopoly is a market structure that occurred when the start-up cost is high or there is a high administrative cost and the need for powerful economies of scale to conduct the business.

d)

To determine

The effect on the size of consumer surplus and firm’s profit when the firm charge P_R rather than P_U

Explanation of Solution

The graph has shown the data as follows:

  

Here, the size of the consumer surplus will increase which will reach the point Q_R but the profit of the firm will reduce to zero when the P_R price is charged by the firm rather than the price of P_U where the profit and consumer surplus was high.

Economics Concept Introduction

Introduction: A natural monopoly is a market structure that occurred when the start-up cost is high or there is a high administrative cost and the need for powerful economies of scale to conduct the business.