Graph represents a natural monopoly

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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?

Reference no: EM13328065

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