The following graph represents a natural monopoly.
1. Explain why is this firm considered a natural monopoly?
2. What price and output would maximize its profit if the firm is unregulated? What would be its profit or loss?
3. What would be the price and output if a regulatory commission establishes a price with the goal of achieving a locative efficiency? What would be the firm's profit or loss?
4. What would be the price and output if a regulatory commission establishes a price with the goal of allowing the firm a "fair return,"? What would be the firm's profit or loss?
5. Explain which one of the prices in parts b, c, and d maximizes consumer surplus? What problem, if any, occurs at this price?