9. Regulating a natural monopoly Consider the local telephone company, a natural monopoly. The following graph shows the demand curve for phone services, the company's marginal revenue curve (labeled MR), its marginal cost curve (labeled MC), and its average cost curve (labeled AC). (Hint: Select a point on the graph to see its exact coordinates.) 160 140 120 100 PRICE (Dollars per month) 8 8 a C N O o 1 2 3 4 5 s 7 8 QUANTITY (Thousands of households per month) Assume no government regulation. If the natural monopoly provides the prot-maximizing output, it will provide phone services to :] households per month at a price of_ and earn a profit of_ per month. Suppose that the government forces the monopolist to set the price equal to marginal cost. In the short run, under a marginal-cost pricing regulation, the monopolist will provide phone services to :' households per month at a price of. If the government forces the natural monopoly to set its price equal to marginal cost, how will the company react in the long run? 0 Because the firm suffers an economic loss under marginal-cost pricing, it will reduce its output to 3,500 households per month in the long run. 0 Because the firm suffers an economic loss under marginal-cost pricing, it will exit the industry in the long run. 0 Because the firm earns a prot under marginal-cost pricing, it will remain in the industry in the long run. Suppose that the government forces the natural monopoly to set its price equal to average cost. Under an average-cost pricing policy, the monopolist would provide phone services to :] households per month at a price of_ and earn a prot of_ per month. True or False: Over time, the telephone company has a very strong incentive to lower costs when subject to average-cost pricing regulations. 0 True 0 False