Question

3. The chart illustrates your local water company's natural monopoly. The diagram shows the demand curve for water, the company's marginal revenue curve, its marginal cost curve (marginal costs are constant), and its average total cost curve. The government wants to regulate the monopolist by imposing a price ceiling. (20 points) a. Label the curves - Demand (D) Marginal Revenue (MR) Marginal Cost (MC) and Average Total cost (ATC) b. If the government does not regulate this monopolist, which price will it charge? c. What quantity of water will be sold? d. What will be the company's profit (calculate). e. Shade the area of profit for the monopolist using vertical lines. illustrate the inefficiency this creates by shading the deadweight loss from monopoly with horizontal lines. g. If the government imposes a price ceiling equal to the marginal cost, will the monopolist make profits or lose money? h. If the government does impose this price ceiling, do you think the firm will continue to produce in the long run? i What price ceiling should the government impose for the monopolist to break even? (approximate) Water Company Monopoly 45.00- 42.50 40.00 37.50 35.00 32.50 30.00- 27.50 25.00- 22.50- 20.00- 17.50- 15.00- 12.50- 7.50 5.00 2.50 0.00 0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88 92 Quantity of water (gallons) Price per Gallon / Costs ($)
parts f, g, h, and i

Answer 1

f) The firm sets MC=MR whereas the perfect competitive firm sets P=MC for profit maximization output

so, the difference between them is the deadweight loss

Water Company Monopoly 45.00 - 42.50- 40.00 - Price per Gallon/Costs ($) 5.00 2.50 0.00 0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88 92 Quantity of water (gallons)

g) When P=MC, the firm will lose money because the ATC is greater than the price

h) In the long run, the firms will exit the market since they are incurring losses and not able to recover their costs

i) The government should set a ceiling equal to the ATC because, at this price, total revenue = total cost and the firms will break even.