What is the socially optimal price for a regulated
monopoly?
How does the fair return price differ from the socially
optimal price?Philosophically, do you believe a company that is
producing a non-essential good should be prevented from achieving
monopoly status if they abide by the law? Why or why not?
1.What is a natural monopoly? Explain with a graph how a
regulated natural monopoly sets its price.
2.Draw a graph that shows a monopoly firm making economic profit
in the short run. Be sure your diagram includes the monopolist’s
demand, marginal revenue, average total cost, and marginal cost
curves. Be sure to indicate the profit maximizing output and price.
Are these profits sustainable in the long run?
Why would it be economically efficient to require a natural
monopoly to charge a price equal to marginal cost? Why do most
regulatory agencies require natural monopolies to charge a price
equal to average cost instead?
Natural monopoly firms are often regulated so that they can only
charge prices set by
the authorities. Under one approach, prices are based on the
monopolist’s costs so that for any given quantity of sales, the
monopolist can only set prices equal to its average costs.
1. Why might regulators believe that forcing the monopoly to
charge a price equal to average cost is a good outcome? Does this
price regulation maximise social welfare? What problems do you see
with...
Find an example of a regulated
monopoly. (If your example is a
regulated monopoly, you may continue with it).
Do you agree that this monopoly should be regulated? If yes,
how does regulating it benefit the society? (You may also consider
what would happen if it weren't regulated)
If no, what are your arguments against regulating it?
What is a natural monopoly? Why do we allow them? What are the
policy options in controlling them? Why can their prices (profits)
be difficult to control and set? Use graphs to illustrate your
answer as appropriate.
In a natural monopoly, the government will try to set the price
at which the demand curve intersects the monopolist's
long-run marginal cost curve.
long-run average total cost curve.
long-run marginal revenue curve.
long-run average fixed cost curve.