Consider the local telephone company, a natural monopoly. The following graph sh
ID: 1108524 • Letter: C
Question
Consider the local telephone company, a natural monopoly. The following graph shows the monthly demand curve for phone services, 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 marginal cost.
Complete the second row of the previous 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.
100 90 80 70 50 ATC- MC O30 20 10 MR 0 2 4 6 810 12 14 16 18 20 QUANTITY (Thousands of subscriptions) 3 8Explanation / Answer
1) The first row of the table.
If the government decides to give a free unregulated run to the monopoly
Quantity subscription will be 6000, Dollar per subscription will be $60. And the company will be making a profit of $120,000 (Positive). The long-run decision will be to stay in the business.
2) If the government forced the firm to operate at marginal cost pricing in that situation the telecom company will get a subscription to 12,000 consumers.And will get $30 per subscription. Profit will be "negative". In the long run, the telecom company will exit the industry.
3) If the government allowed the telecom company to sell its services at Average price costing. In that situation, the company will get a subscription of 11,000 consumers and at a cost of $35 per subscription. The company's profit, in that case, will be ZERO. In the long run, the company can stay or exit the business.