From the graph you drew to answer Exercise 11.6, would you say this transit system is a natural monopoly? Justify. Use the following information to answer the next three questions. In the years before wireless phones, when telephone technology required having a wire running to every home, it seemed plausible that telephone service had diminishing average costs and might require regulation like a natural monopoly. For most of the twentieth century, the national U.S. phone company was AT&T, and the company functioned as a regulated monopoly. Think about the deregulation of the U.S. telecommunications industry that has occurred over the last few decades.

Exercise 11.6

Urban transit systems, especially those with rail systems, typically experience significant economies of scale in operation. Consider the transit system data in Table 11.4. Note that the quantity is in millions of riders.

Table 11.4

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Demand: Costs: Quantity 1 2 Price 10 9 Marginal Revenue 10 8 Marginal Cost 9 6 Average Cost 7.5 9 3 8 6 5 6.7 4 7 4 3 5.8 6 2 2 6 5 0 3 7 4 -2 4 4.7 4.6 8 3 -4 5 4.6 9 2 -6 7 4.9 10 1 -8 10 5.4