Question
L&P Power is a natural monopoly supplying electricity for a city. The firm produces the profit-maximizing quantity of electricity and earns a positive economic profit.
L&P Power is a natural monopoly supplying electricity for a city. The firm produces the profit-maximizing quantity of electricity and earns a positive economic profit. (a) Describe a condition that distinguishes a natural monopoly from a typical monopoly. (b) Draw a correctly labeled graph for the natural monopoly market in which L&P Power operates and show each of the following. (i) The profit-maximizing quantity, labeled (ii) The profit-maximizing price, labeled (iii) The area representing economic profit, shaded completely (c) Suppose the government wants to regulate L&P to produce the maximum quantity that would allow it to eam zero economic profit. On your graph in part (b), show the maximum quantity it will produce to eam zero economic profit, labeled , and price, labeled . (d) Suppose instead the government wants to regulate L&P to produce the allocatively efficient quantity. (i) Does L&P earn positive economic profit if it produces the allocatively efficient quantity? Explain. (ii) Under what condition will L&P agree to produce the allocatively efficient quantity?
L&P Power is a natural monopoly supplying electricity for a city. The firm produces the profit-maximizing quantity of electricity and earns a positive economic profit. (a) Describe a condition that distinguishes a natural monopoly from a typical monopoly. (b) Draw a correctly labeled graph for the natural monopoly market in which L&P Power operates and show each of the following. (i) The profit-maximizing quantity, labeled (ii) The profit-maximizing price, labeled (iii) The area representing economic profit, shaded completely (c) Suppose the government wants to regulate L&P to produce the maximum quantity that would allow it to eam zero economic profit. On your graph in part (b), show the maximum quantity it will produce to eam zero economic profit, labeled , and price, labeled . (d) Suppose instead the government wants to regulate L&P to produce the allocatively efficient quantity. (i) Does L&P earn positive economic profit if it produces the allocatively efficient quantity? Explain. (ii) Under what condition will L&P agree to produce the allocatively efficient quantity?
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