Consider the local telephone company, a natural monopoly. The following graph sh
ID: 1222797 • 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 table.
Suppose that the government forces the monopolist to set the price equal to average total cost.Complete the third row of the table.
Option for table are
Profit max (QUANTITY) = 6000 / 11000 / 12000 (PRICE) = 30 / 35 / 40 / 60 (PROFIT) = negative / postive / zero (LONG-RUN DECISION) = exit the industy /stay in business / stay or exit
Marginal-cost pricing=Quantity) = 6000 / 11000 / 12000 (PRICE) = 30 / 35 / 40 / 60 (PROFIT) = negative / postive / zero (LONG-RUN DECISION) = exit the industy /stay in business / stay or exit
Average cost pricing=Quantity) = 6000 / 11000 / 12000 (PRICE) = 30 / 35 / 40 / 60 (PROFIT) = negative / postive / zero (LONG-RUN DECISION) = exit the industy /stay in business / stay or exit
True or False: Under the average-cost pricing policy, the telephone company has no incentive to cut costs.
100 90 70 50 40 ATC- MC ) 10 MR 0 0 24 6 810 12 14 1618 20 QUANTITY (Thousands of subscriptions) 1 3Explanation / Answer
1)
profit maximisation ( where MR= MC)
quantity= 6000
price= 60
profit= positive
long run decision =stay in business
2)
Marginal cost pricing ( P=MC)
Q= 12000
P= 30
profit= negative
decision = exit the industry
3) Average cost pricing (P=AC)
Q=11000
P=35
profit=0
decision = stay
4) True or False: Under the average-cost pricing policy, the telephone company has no incentive to cut costs.
True
because if cost or AC will decraese priec will also decrease and profit will remain zero , so no incentive to cut cost