Question

Suppose Madison Gas and Electric (MGE) is a natural monopoly for electricity. That is the case where no firm can produce the total quantity in a market more cheaply than multiple firms because there is a large fixed cost or economies of scale in this industry. The demand curve, average total cost curve, marginal cost curve, and margin revenue for this firm are shown in the picture below.

Homework 4_windoor - Word esign Layout References Mailings Review View Help T XAP-A : Aalbox Abc AaBbc Aabbcc Aa 1 Normal No Spac. Heading Heading To Paragraph Styles The government decides to regulate this marketing marginal cost pricing That is the firm isted to produce that level of output where MC is equal to P for the last unit produced al Identity in the graph the quantity and price Part ies under this scheme label it with the letter "A" Is this regulatory scheme effident who or why not? by Compute the profit of the firm. What is the minimum amount of subsidy that will be necessary in order to keep this monopolist in business? Suppose the government decides to use average cost pricing regulation. That is the ment tells the monopoly to produce that level of output where the firm an e conomic pretit cl Identity in the graph the equilibrium price and quantity that corresponds to this type of regulation label it with the letter "B". d) Is this price and output combination efficient? Why or why not? # J K L

Answer 1

a In za the the cost case case of marginal pricing & Mc QMC = 14 units Losses brice IB C ATC — Мс Yes, the reaulation is efficient Ac because t price or is equal to Marginal cost. (b) Lince Pr CATC, the firm is a earning losses depicted by red shaded Duantity 2x I area & brasite = (- ATC) x = (12-18x14 CAC OMC = - $84. e da case of Average cost beining, Equilibrium price = 920. Equilibrium duantity = lo write. (d) brice is efficient but duantity is not efficient because is firm the not producing at its full capacity