7. Regulating a natural monopoly Consider the only internet service provider in a small town, which you can assume operates as a natural monopoly. The following graph shows the demand curve for internet services per month, as well as the provider's marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. 100 90 -- 80 50 40 30 PRICE (Dollars per subscription) ATC 20 MC 10 o 2 4 6 8 10 12 14 16 1a 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 rst row of the following table. Short Run Quantity Price Pricing Mechanism (Subscriptions) (Dollars per subscription) Profit Long-Run Decision Profit Maximization V L V V Marginal-Cost Pricing L V V Average-Cost Pricing L V V Suppose now that the govern s to require the monopolist to set its price equal to marginal cost. 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 tab/e. Under averagecost pricing, the government will raise the price of output whenever a firm's costs increase, and lower the price whenever a firm's costs decrease. Over time, under the average-cost pricing policy, what will the local internet service provider most likely do? 0 Allow its costs to increase O Work to decrease its costs 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 V L V V Marginal-Cost Pricing V V V Average-Cost Pricing V V V Suppose now that the government decides to require the mo to set its price equal to marginal cost. 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. Under averagecost pricing, the government will raise the price of output whenever a firm's costs increase, and lower the price whenever a firm's costs decrease. Over time, under the averagecost pricing policy, what will the local internet service provider most likely do? 0 Allow its costs to increase 0 Work to decrease its costs 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 rst row of the following table. Short Run Quantity Price Pricing Mechanism (Subscriptions) (Dollars per subscription) Profit Long-Run Decision Profit Maximization Y Y V V Marginal-Cost Pricing V v v Negative Average-Cost Pricing V V v Positive Suppose now that the government decides to require the monopolist to set its pri- arginal cost. Zero 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. Under average-cost pricing, the government will raise the price of output whenever a firm's costs increase, and lower the price whenever a firm's costs decrease. Over time, under the averagecost pricing policy, what will the local internet service provider most likely do? 0 Allow its costs to increase 0 Work to decrease its costs 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 rst row of the following table. Short Run Quantity Price Pricing Mechanism (Subscriptions) (Dollars per subscription) Profit Long-Run Decision Profit Maximization V V 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 St 't ay or exu 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 tab/e. Under average-cost pricing, the government will raise the price of output whenever a firm's costs increase, and lower the price whenever a firm's costs decrease. Over time, under the average-cost pricing policy, what will the local internet service provider most likely do? 0 Allow its costs to increase 0 Work to decrease its costs