7. Regulating a natural monopoly Consider the only electric company in a small town, which you can assume operates as a natural monopoly. The following graph shows the demand curve for electricity services per month, as well as the provider's marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. 100 -- 80 70 60 50 40 30 PRICE (Dollars per subscription) 20 ____ ATC 10 _____I MC MR D 0 | l l I l | I I ' ' ' 0 2 4 6 8 10 12 14 16 18 20 QUANTITY (Thousands of subscriptions) Suppose the government has elected not to impose regulations on the industry, and so the firm faces no regulatory constraints in maximizing profits. Complete the first row of the following table. Short Run Quantity Price Pricing Mechanism (Subscriptions) (Dollars per subscription) Profit Long-Run Decision Profit Maximization 7,000 V 10 Y Negative V V Marginal-Cost Pricing V V V Exit the industry Average-Cost Pricing V V v Stay in business Suppose now that the government decides to require the monopolist to set its price equal to marginal Sta 0 e 't y r xu Complete the second row of the previous table. Suppose now that the government decides to require the monopolist to set its price equal to average total cost. Complete the third row of the previous table. True or False: Over time, the electric company has a very strong incentive to lower costs when subject to average-cost pricing regulations. 0 True O False