The following graph represents a natural monopoly.
a. Why is this firm considered a natural monopoly? Because (Long Run) Average Cost is always downward-sloping.
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 one of the prices in parts b, c, and d maximizes consumer surplus? What problem, if any, occurs at this price?