Question
Explain what a natural monopoly is. Why is it that, even though a natural monopolist might be earning high economic profits, other firms will still
Explain what a natural monopoly is. Why is it that, even though a natural monopolist might be earning high economic profits, other firms will still decline to enter the industry and compete against the incumbent? Discuss the reasons for the government to impose price regulation and examine the impact of the policy on the firm. Explain what the firm and the government should do to overcome any undesirable outcomes of the policy.
a) Use the given information to draw the diagrams to represent the market equilibrium and firm equilibrium. Label the equilibrium price and quantity of the market and the equilibrium quantity of the firm.
b) Determine and describe the initial market equilibrium price and quantity, consumer surplus, producer surplus, and total surplus.
c) Determine and describe the firm's equilibrium quantity and profit. Can this firm continue to make the profit in the long run? Explain.
d) Assume a firm, in the long run, produces 400 units and the firm's minimum average total cost is $20. What is the new market equilibrium price and quantity and how many new firms have entered the market? Assume the new firms and existing firms are identical.
e) Suppose the government decided to set a price ceiling of $20 per unit. Use your diagram in part(a) to determine and explain how the price policy affects the market, consumers, and producers, and market efficiency.
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