Regulations Natural Monopolies
The following graph represents a natural monopoly.
Required:
Question 1: Why this firm considered the natural monopoly?
Question 2: If the firm is unfettered, what output and price would maximize its profit? What would be its profit or loss?
Question 3: If the regulatory commission establishes the price with the goal of accomplishing allocative efficiency, what would be the output and price? What would be the firm’s profit or loss?
Question 4: If a regulatory commission establishes the price with the goal of allowing firm a “fair return,” what would be the output and price? What would be the firm’s profit or loss?
Question 5: Which one of prices in parts b, c, and d maximizes consumer surplus? What problem, if any, takes place at the price?