
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Transcribed Image Text:HW#5 (Monopoly, Monopolistic Competition, Oligopoly)
8. Regulating a natural monopoly
Consider the local telephone company, a natural monopoly. The following graph shows the monthly demand curve for phone services and the
company's marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves.
100
90
80
70
60
50
40
30
20
ATC
MC-
10
MR
6 8 10
12 14
16
18
20
QUANTITY (Thousands of subscriptions)
PRICE (Dollars per subscription)

Transcribed Image Text:Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints.
Complete the first row of the following table.
Short Run
Quantity
Price
Pricing Mechanism
(Subscriptions) (Dollars per subscription)
Profit
Long-Run Decision
Profit Maximization
Marginal-Cost Pricing
Average-Cost Pricing
Suppose that the government forces the monopolist to set the price equal to marginal cost.
Complete the second row of the previous table.
Suppose that the government forces the monopolist to set the price equal to average total cost.
Complete the third row of the previous table.
True or False: Under the average-cost pricing policy, the telephone company has no incentive to cut costs.
True
False
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