1. L&P Power is a natural monopoly supplying electricity for a city. The firm produces the profit-maximizingquantity of electricity and earns a positive economic profit.(a) Describe a condition that distinguishes a natural monopoly from a typical monopoly.(b) Draw a correctly labeled graph for the natural monopoly market in which L&P Power operates and showcach of the following.(i) The proſīt-maximizing quantity, labeled QM(ii) The profit-maximizing price, labeled PM(iii) The area representing economic prolit, shaded completlely(c) Suppose the government wants to regulate L&P to produce the maximum quantity that would allow it toearn zero economic profit. On your graph in part (b), show the maximum quantity it will produce to earnzero economic profit, labeled Qr, and price, labeled PR-(d) Suppose instead the government wants to regulate L&P to produce the allocatively efficient quantity.(i) Does L&P earn positive economic profit if it produces the allocatively efficient quantity? Explain.(ii) Under what condition will L&P agree to produce the allocatively efficient quantity?

Since you have posted a question with multiple sub-parts, we will solve the first three subparts for…

esentu Suppose the government wants to regulate L&P to p earn zero economic profit. On your graph in part (b) zero economic profit, labeled QR. and price, labeled Suppose instead the government wants to regulate L

esentu Suppose the government wants to regulate L&P to p earn zero economic profit. On your graph in part (b) zero economic profit, labeled QR. and price, labeled Suppose instead the government wants to regulate L

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter14: Monopoly

Section: Chapter Questions

Problem 14.5P

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Question

100%

1. L&P Power is a natural monopoly supplying electricity for a city. The firm produces the profit-maximizing
quantity of electricity and earns a positive economic profit.
(a) Describe a condition that distinguishes a natural monopoly from a typical monopoly.
(b) Draw a correctly labeled graph for the natural monopoly market in which L&P Power operates and show
cach of the following.
(i) The proſīt-maximizing quantity, labeled QM
(ii) The profit-maximizing price, labeled PM
(iii) The area representing economic prolit, shaded completlely
(c) Suppose the government wants to regulate L&P to produce the maximum quantity that would allow it to
earn zero economic profit. On your graph in part (b), show the maximum quantity it will produce to earn
zero economic profit, labeled Qr, and price, labeled PR-
(d) Suppose instead the government wants to regulate L&P to produce the allocatively efficient quantity.
(i) Does L&P earn positive economic profit if it produces the allocatively efficient quantity? Explain.
(ii) Under what condition will L&P agree to produce the allocatively efficient quantity?

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