8 . Natural monopoly analysis The following graph shows the demand (D) for gas services in the imaginary town of Utilityburg. The graph also shows the marginal-revenue (MR) curve, the marginal-cost (MC) curve, and the average-total-cost (ATC) curve for the local gas company, a natural monopolist. On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity for this natural monopolist. 20 18 16 Monopoly Outcome 14 12 10 PRICE (Dollars per hundred cubic metres) Co 6 ATC N MR D 1 2 3 4 5 6 7 8 9 10 QUANTITY (Hundreds of cubic metres)Which of the following statements are true about this natural monopoly? Check all that apply. [1 In order for a monopoly to exist in this case, the government must have intervened and created it. [1 It is more efficient on the cost side for one producer to exist in this market rather than a large number of producers. [1 "he gas company is experiencing economies of scale. [1 "he gas company is experiencing diseconomies of scale. True or False: Without government regulation, natural monopolies always earn zero profit in the long run. 0 True 0 False 9 . Regulating a natural monopoly ConSider the local telephone company, a natural monopoly. The following graph shows the monthlyr demand curve for phone services, the company's marginalrevenue (MR), marginalcost (MC), and averagetotalcost (ATC) curves. ('2) 101] 90 \\ 80 3'0 60 50 40 30 PRICE (Dollars per subscription) 20 1E] U 2 4 6 8 11] 12 14 16 1B 21] QUANTITY (Thousands of subscriptions) Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profitsJ without constraints. Complete the first row of the following tahie. Short Run Quantity Price Pricing Mechanism (Subscriptions) {Dollars per subscription) Profit Long-Run Decision Profit Maximization T l T T MarginalCost Pricing V l T T Average-Cost Pricing V l T T Suppose that the government forces the monopolist to set the price equal to marginal cost. Complete the second row of the previous table. Suppose that the government forces the monopolist to set the price equal to average total cost. Complete the third row of the previous tahie. True or False: Under the averagecost pricing policy, the telephone companyr has no incentive to cut costs. ,_ K.) True ,_ K.) False 10 . Public policy toward monopolies Suppose that the government is concerned that an electric utility company is taking advantage of consumers with unfair pricing policies. The government views electricity as a public good that is likely to be produced inefficiently by the private sector. Which of the following policy options might most effectively enable the government to achieve its objectives in this situation? 0 Regulate the pricing behaviour. 0 Turn the company into a public enterprise. O Use the law to increase competition. 0 Do nothing at all. 11 . Conditions for monopolistic competition Consider the monopolisticallyr competitive market structure, which has some features of a competitive market and some features of a monopoly. Complete the following table by indicating if each attribute characterizes a competitive manket, a monopolistically competitive market, both, or neither. Check all that apply. Attributes Competitive Market Monopolistically Competitive Market Price is equal to marginal cost [:I C] Few sellers Cl U Product differentiation [:I C] Many sellers [:I C] 12 . How short-run profit or losses induce entry or exit Fantastique Bikes is a company that manufactures bikes in a monopolistically competitive market. The following graph shows Fantastique's demand curve, marginal-revenue curve (MR), marginal-cost curve (MC), and average-total-cost curve (ATC). Place the black point (plus symbol) on the graph to indicate the short-run profit-maximizing price and quantity for this monopolistically competitive company. Then, use the green rectangle (triangle symbols) to shade the area representing the company's profit or loss. 500 .+ 450 400 Monopolistically Competitive Outcome 350 ATC 300 Profit or Loss PRICE (Dollars per bike) 250 200 150 100 MC 50 MR Demand 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Bikes)Given the protmaximizing choice of output and price, the shop is making V prot, which means there are V shops in the industry relative to the longrun equilibrium. Now conSIder the long run in which bike manufacturers are free to enter and eXIt the market. Show the possibie effect of this free entry and exit by shifting the demand curve for a typicai individuai producer of bikes on the foiiowihg graph. Demand PRICE (Dollars per bike) Demand QUANTITY (Bikes) Which of the following statements are true about both monopolistic competition and monopolies? Check all that apply. [7 Price equals average total cost in the long run. [7 Firms can earn positive prot in the long run. [_l Firms are not price takers. l_l Firms earn zero profit in the long run. 13 . Is monopolistic competition efficient? Suppose that a firm produces polo shirts in a monopolistically competitive market. The following graph shows its demand curve, marginal-revenue (MR) curve, marginal-cost (MC) curve, and average-total-cost (ATC) curve. Place a black point (plus symbol) on the graph to indicate the long-run monopolistically competitive equilibrium price and quantity for this firm. Next, place a grey point (star symbol) to indicate the minimum average total cost the firm faces and the quantity associated with that cost. 100 90 Mon Comp Outcome 80 70 Min Unit Cost 60 50 PRICE (Dollars per shirt) ATC 40 30 20 10 MC MR Demand 0 0 10 20 30 40 50 60 70 80 90 QUANTITY (Thousands of shirts)Because this market is a monopolistically competitive market, you can tell that it is in longrun equilibrium by the fact that V at the optimal quantity for each rm. Furthermore, a monopolistically competitive firm's average total cost in longrun equilibrium is V the minimum average total cost. True or False: This indicates that there is no excess capacity in the market for shirts. 0 True 0 False 14 . The role of brand names and advertising Which of the following statements about expenditures on advertising is true? 0 If a firm knows its product is of low quality, it will be willing to spend large amounts of money on advertising. 0 When a firm spends a large amount of money on advertising, advertising can be construed as a signal of quality. 0 When a firm spends a small amount of money on advertising, this signals that the quality of the good is high. Read the following example and determine whether it illustrates a common critique or defence of advertising. While shopping for soda, Hilary is trying to determine whether to purchase the generic cola or the brand ZCola. Although she would not notice the difference between the two in a blind taste test, she buys the higherpriced ZCola because she has seen it advertised as being "The drink that's the life of partieZ." This illustrates a common 7 of advertising