Question

5) The following graph represents the market for electricity in a certain small town. De market demand and MR = marginal revenue for the market. There is one supplier of electricity in this town, PG&E whose costs are represented in the graph. $12 ttttttttttt NUCU 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 IMR

Answer 1

A.

It is a natural monopoly, because it shows that it has high level of fixed investment in the beginning. Afterward, the ATC decreases and economy of scale is achieved. It shows the existence of natural monopoly.

B.

The output will be produced at MR = MC level, to maximize the profit.

So,

Output = 7.3

Price = 7

C.

It will create allocative as well as productive inefficiency in its operations. As a result, price is high output is low. It creates a dead weight loss to the consumers.

D.

When government puts the price, then it will be P = MC

So, price will be $1 where demand curve cuts the MC curve.

E.

No, firm will not produce at this price level in the long run. In the long run, it should have a price that is MR = ATC = $3

So, government has to give subsidy to the firm so that firm can cover its all the explicit and implicit cost to earn zero economic profit.

F.

They should set the Price where MR = ATC. So, it will be $3.

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