Question

The table below depicts the cost and demand structure a natural monopoly faces.

Quantity	Price ($ per unit)	Long-Run Total Cost ( $ )	Total Revenue ($)	Total   Profit ($)	Long-run Average Cost ($ per unit)	Marginal Cost ($ per unit)	Marginal Revenue ($ per unit)
0	50.00	0.00	-	-		-
1	47.50	40.00	40	47.50
2	45.00	81.00	40.5	90
3	42.50	118.50	39.50	127.5
4	40.00	160.00	40	160
5	37.50	197.50	39.50	187.70
6	35.00	245.40	40.9	210

a. Calculate total revenue, total profit, LR average cost, marginal cost, marginal revenue at each output level (complete the table).

b. If this firm is allowed to operate as a monopolist, what will be the quantity produced and the price charged by the firm? [Hint: identified the total profit at the point where MR=MC]

c. If regulators require the firm to practice marginal cost pricing (price cannot be higher than marginal cost). What is the firm’s profit (loss) under this regulatory framework? [Hint: identified the total profit at the point where price = marginal cost]

d. If regulators require the firm to practice average cost pricing, what is the firm’s profit under this regulatory framework? [Hint: identified the total profit at the point where price = average cost]

e. Based on your analysis, what should regulators due? (i.e., what practice should regulators allow? Let the firm operate as a monopolist? Require the firm to practice marginal cost pricing? Require the firm to practice average cost pricing?). Please explain. [Hint: See textbook, page 604 - 605]

Answer 1

a) The table with all the columns:

Quantity	Price	LRTC	TR	Profit	AC	MC	MR
0	50	0	0	0	0	0	0
1	47.50	40	47.50	7.50	40	40	47.50
2	45	81	90	9	40.50	41	42.50
3	42.50	118.50	127.50	6	39.50	37.50	37.50
4	40.00	160	160	0	40.00	41	32.50
5	37.50	197.50	187.50	-10	39.50	37.50	27.50
6	35	245.40	210	-35.40	40.9	47.9	22.50

b) If it is a monopoly, MR = MC = 40. Quantity = 3 , Price = $42.50. Profit will be $6

It is given in the table. Highlighted in green

c) Regulators want marginal pricing. So, Price = marginal cost = 37.50. Loss= $10

It is from the table. Highlighted in yellow.

d) regulators want average cost pricing. So price = AC =. 40. At this level, profit = 0

From the table.It is highlighted iin blue.

e) Regulators should require the firm to practice average cost pricing. If the firm practices monopoly, there is welfare lost. If it practies marginal cost pricing, the firm will undergo loss. So, average cost pricing will keep the firm going at 0 profit. That is what firms do in perfect competition. The long run price is = average cost.