1. Evaluate the following statement: "Regulators do not observe the ever-changing demand or technologies used by natural monopolists; hence, regulating natural monopolists to achieve average cost pricing is almost impossible". [50 marks]

2. As the contract for a private company to operate a highway is about to expire, the government is mulling three ways to select a new operator and regulate it: (1) re-appoint the company and regulate it using rate-of-return regulation, (2) do franchise bidding to select a winner and regulate it using price-cap regulation and performance standard a few years later, (3) do multidimensional franchise bidding with recurrent short-term contracts. Recommend the best way for the government to select a highway operator and induce the company to maintain the highway and achieve average cost pricing. Show that it is the best way to achieve the objectives. [50 marks]