a. Let’s imagine that the firm with cost curves illustrated in the left panel of the figure below is a large cable TV provider.

Assuming that the firm is free to maximize profit, label the profit-maximizing price, quantity, and the firm’s profit.

b. Now assume that the firm is regulated and that the regulator sets the price so that the firm earns a normal (zero) profit. What price does the regulator set and what quantity does the firm sell? (Label this price and quantity on the diagram.)

c. Which price and quantity pair do consumers prefer, that in part a or b? Do consumers benefit from price regulation?

d. Imagine that the cable TV provider can invest in fiber optic cable (high-definition), better programming, movie downloading, or some other service that increases the demand for the product, as shown in the right panel.

If the firm were regulated as in part

b, do you think it would be more or less likely to make these investments?

e. Given your answer in part

d, revisit the question of price regulation and make an argument that price regulation could harm consumers once you take into account dynamic factors.

Would this argument apply to all consumers or just some? If so, which ones? p=58 

Transcribed Image Text:

Price Old demand AC "MC Price New demand AC MC MR Quantity MR Quantity