Assignment
Regulating Natural Monopolies
The following graph represents a natural monopoly:
a. Why is this firm considered a natural monopoly?
b. If the firm is unregulated, what price and output would maximize its profit? What would be its profit or loss? Explain your answer.
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? Explain your answer.
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?