Question

3. Onus residents, in questions 2.a.–d. above, complain to their local politicians about the high prices. In an attempt to reduce the exorbitant price that the residents must pay for ferry service to and from the mainland, the local politicians convince the legislature to create a regulatory board which will impose a legal price ceiling on the Onus monopoly ferry operator.

a. In this scenario, the regulatory board imposed a price ceiling on the Onus monopoly ferry operator that was calculated to be below the ferry operator’s lowest ATC, but well above its lowest AVC. Explain in significant detail, what will be the short run and long run impacts of such a price ceiling on the Onus monopoly ferry operator’s profits and continued ability to provide service to the inhabitants of the island of Onus. (4 points)

b. In this scenario, the regulatory board imposed a price ceiling on the Onus monopoly ferry operator that was calculated to be well above the ferry owner’s lowest AVC and equal to the ferry owner’s lowest ATC. Explain in significant detail, what will be the short run and long run impacts of such a price ceiling on the Onus monopoly ferry operator’s profits and continued ability to provide service to the inhabitants of the island of Onus. (3 points)

c. In this scenario, the regulatory board, imposed a price ceiling on the Onus ferry operator that was calculated to be well above the ferry owner’s lowest AVC and well above the ferry owner’s lowest ATC. Explain in significant detail, what will be the short run and long run impacts of such a price ceiling on the Onus monopoly ferry operator’s profits and continued ability to provide service to the inhabitants of the east coast island of Onus. (4 points)

Answer 1

a. In this scenario if regulatory board imposes price below ATC but well above of minimum AVC of monopoly ferry operator then in the SR ferry operator will be able to cover variable cost in the SR but it will make loss in the SR. Because as price charged by the ferry is below ATC it can not cover TC because it is a condition of above shut down point but below break even point. In the short run the monopoly will stay in the business but in LR if there fall in AC there is possible that monopoly will stay in the business and if AC continuously be higher than the price it is very tough to stay in the business in the long run. In the long run after being loss monopoly will leave the market because AC is higher than the price.

b. In this scenario if price ceiling is such that it is well above the minimum of AVC and equal to lowest ATC and in this the ferry owner will be able to earn normal profit in the short run and will continue to stay in the business. In the LR the ferry will stay in the business and continue to run the business in the LR. In the long run the ferry owner will be able to earn normal profit. It is a no profit no loss situation.

c. In this scenario if price ceiling is such that it is well above of minimum AVC and well above of minimum ATC then in SR the ferry owner will make profit and continue to stay in the business. In the LR the ferry owner will make super normal profit. In this case ferry owner will make profit in SR and in the LR.