Monopoly with fixed costs. (12 points) GLS Ch9 P18. Consider the firm depicted in the diagram below....

Question

Monopoly with fixed costs. (12 points) GLS Ch9 P18. Consider the firm depicted in the diagram below. (a) (2 points) Is the firm a natural monopoly? How do you know? (b) (2 points) Will this firm earn a profit if it is not subject to regulation? How do you know? (c) (2 points) If the government requires the firm to charge no more than its marginal cost of production, how many units will be sold? At what price? What is the problem with the government capping prices at marginal cost? 1 (d) (2 points) Suppose the government allows firms to charge no more than their average total costs of production. How many units will this firm sell? At what price? What is the problem with capping prices at average total cost? (e) (4 points) Evaluate the deadweight loss under each of the three pricing regimes above by showing each regime’s deadweight loss as an area on the graph. (You do not need to do any calculations.)

Robert · Accepted Answer

a) With a natural monopoly, average total cost (ATC) keeps falling because of continuous 
economies of scale. Hence given figure represents natural monopoly. 
b) Yes, because its price (where MR = MC) is above the cost line. This makes profit positive. 
c) At the MC pricing point,

Monopoly with fixed costs. (12 points) GLS Ch9 P18. Consider the firm depicted in the diagram below. (a) (2 points) Is the firm a natural monopoly? How do you know? (b) (2 points) Will this firm earn...

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