Question

8. Natural monopoly analysis The following graph shows the demand (D) for electricity services in the imaginary town of Utilityburg. The graph also shows the marginal revenue (MR) curve, the marginal cost (MC) curve, and the average total cost (ATC) curve for the local electricity company,a natural monopolist. On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity for this natural monopolist 40 36 32 28 t 24 Monopoly Outcome a 20 t 5 16 MC MR 0 12 3 45 6789 10 QUANTITY (Thousands of kilowatt-hours)

Answer 1

Profit maximization for a natural monopolist is at the intersection of MR and MC and extended to the demand curve. Natural monopolist is a price taker and can sell more if the price is reduced. He will face downward sloping demand curve.

A natural monopolist enjoys monopoly over a scarce resource and there is room only for one player in the industry. Due to high costs of operating in the industry, the natual monopolist will be able to enjoy the economies of scale. The ATC will be diminishing. So statements 2,3, and 4 are true.

False. The monopolist will be able to earn normal profit, because the regulated price will be equal to ATC.