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9. Regulating a natural monopoly Consider the local telephone company, a natural monopoly. The following graph...

9. 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.

 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.

 

 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: Over time, the telephone company has a very strong incentive to lower costs when subject to average-cost pricing regulations.

 True

 False

 

 

 

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Rahul Sunny answered 2 years ago
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