MICROECONOMICS

Instructions

Regulating Natural Monopolies The following graph represents a natural monopoly:           

     a.  Why is this firm considered a natural monopoly?

     b. If the firm is unregulated, what price and output would maximize its profit? What would          be its profit or loss? Explain your answer.

     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?          Explain your answer.

     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?