9. Regulating a natural monopoly

Consider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services and the company's marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves.

9. Regulating a natural monopoly Consider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services and the company's marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves. E .9 a Q ': u in .0 :i in I- a) O. l'.' E {3 D v LU Q n: D. QUANTITY (Thousands of subscriptions) Suppose that the government has decided not to regulate this industry, and the rm is free to maximize profits, without constraints. Complete the rst row of the following table. Short Run Quantity Price Pricing Mechanism (Subscriptions) (Dollars per subscription ) Prot Long-Run Decision Prot Maximization v v v v Marginal-Cost Pricing v V v v Average-Cost Pricing v V v 17 Exit the industry Suppose that the government forces the monopolist to set the price equal to marginal cost. Stay in business Complete the second row of the previous table. stay or exit Suppose that the government forces the monopolist to set the 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 rm's costs increase, and lower the price whenever a rm's costs decrease. Over time, under the average-cost pricing policy, what will the local cable company most likely do? 0 Allow its costs to increase 0 Work to decrease its costs