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Regulatory Issues

In Figure 27.2,
( a ) How much profit does an unregulated monopolist earn?
( b ) How much profit would be earned if MC pricing were imposed?

2. Do total profits (A) decrease, (B) increase, or (C) stay the same when new technology reduces
average total costs (shifts ATC downward in Figure 27.2) in
( a ) An unregulated natural monopoly?
( b ) A price-regulated natural monopoly?
( c ) A profit-regulated natural monopoly?

Suppose a natural monopolist has fixed costs of $24 and a constant marginal cost of $2. The
demand for the product is as follows:
Price (per unit) $10 $9 $8 $7 $6 $5 $4 $3 $2 $1
Quantity demanded
(units per day) 0 2 4 6 8 10 12 14 16 18
Under these conditions,

( a ) What price and quantity will prevail if the monopolist isn't regulated?

( b ) What price-output combination would exist with efficient pricing (MC 5 p )? ( a1 ) Price
( a2 ) Quantity
( c ) What price-output combination would exist with profit regulation ( b1 ) Price
(zero economic profits)? ( b2 ) Quantity
Illustrate your answers on the following graph: ( c1 ) Price
(c2 ) Quantity
Price or Cost (dollars per unit)
$11

10

9

8

7

6

5

4

3

2

1
1 2 3 4 5 6 7 8 9 10 11

(Quantity units per day)

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Solution Summary

The regulatory issues for quantity issues are determined.

$2.19