Hardly Limited is a natural monopolist; it has large fixed costs and continuously declining average costs.

a) Draw a diagram similar to Figure 2 in the text, to show Hardly's equilibrium output and price. (Hint: remember the relationship between marginal and average curves.)

b) Suppose the government forces Hardly to produce at the point it thinks a purely competitive industry would achieve, where price was equal to marginal cost. What problem would this create for Hardly?