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(Regulating a Natural Monopoly) The following graph represents a natural monopoly

(Regulating a Natural Monopoly) The following graph represents a natural monopoly
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ECONOMICS

MT445 / MT 445
Managerial Economics
Kaplan University (KU Campus)

William A. McEachern
Economics: A Contemporary Introduction, 8e
Hoboken, NJ: John Wiley & Sons.

Unit 7: Regulation, Antitrust, Public Goods, and Public Choice

Unit 7 Project

10. (Regulating a Natural Monopoly) The following graph represents a natural monopoly:

a. Why is this firm considered a natural monopoly?
b. If the firm is unregulated, what price and output would maximize its profit? What would be its profit or loss?
c. If a regulatory commission establishes a price with the goal of achieving allocative efficiency, what would be the price and output? What would be the firm’s profit or loss?
d. If a regulatory commission establishes a price with the goal of allowing the firm a “fair return,” what would be the price and output? What would be the firm’s profit or loss?
e. Which of the prices in parts b, c, and d maximizes consumer surplus? What problem, if any, occurs at this price?

 

FILE: MS WORD

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