9 Regulating a natural monopoly Consider the local cable com

9. Regulating a natural monopoly Consider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services and the company\'s marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves. 100 90 80 70 60 50 30 20 ATC 10 MR 0 2 46 10 12 14 16 18 20

Solution

Profit Mechanism

Q

Price

Profit

Long run

Profit Maximisation

8

50

240

Continue

Marginal-Cost pricing

16

10

-80

Increase price

Average-Cost pricing

15

15

0

Increase price

True. As the cost is decreasing and is at minimum the cable company has no incentive to cut costs

Profit Mechanism	Q	Price	Profit	Long run
Profit Maximisation	8	50	240	Continue
Marginal-Cost pricing	16	10	-80	Increase price
Average-Cost pricing	15	15	0	Increase price