Question
1)Consider a regulated natural monopoly with an initial price (equal to average cost) of $3 per unit. Suppose the demand for the monopolist's product increases.
1)Consider a regulated natural monopoly with an initial price (equal to average cost) of $3 per unit. Suppose the demand for the monopolist's product increases. What will happen to the price? How does this differ from the effects of an increase in demand for a product produced in a price taker market? (2 points)
2)Explain why participants in an industry would want the government to require licenses for them to operate, even if the licenses are costly to obtain. (2 points)
3)Suppose the government places a sales tax on firms in a price searcher with high barriers industry. Draw a diagram showing the short-run impact and the adjustment to the new long run industry equilibrium. What happens to the equilibrium price and number of firms in the industry? (5 points)
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