Student Name: Inadequate Competition Formulas, work, and analysis must be shown to earn points. 1. Draw a graph of a typical natural monopoly with declining costs. a. Llabel monopoly price and quantity. ldentify the area of deadweight loss when the monopoly chooses the profit-maximizing level of output. b. Label marginal cost price and quantity. i. How will the area of deadweight loss be impacted with marginal cost pricing? ii. What are the drawbacks to this approach? c. Label fair return price and quantity. What are the pros and cons of fair return pricing? d. What is incentive regulation? What are the positive and negative impacts of this strategy? 2. The diagram below shows the cost and revenue curves for a ski lift to the top of Mount Everest. The price is the lift fee charged by the firm that operates the ski lift. The output is the number of passengers that use the lift each day. b. Now assume that the governmment regulates this enterprise and sets the price to achieve allocative EftlE'l'H:'lj Using the diagram, identify: [ If the price was set at 58, is the firm's accounting profit positive, negative, or zero? Explain. d. Suppose the government opted to set the price such that the firm would just cover all of its economic costs. Using the diagram, identify: Is demand elastic, inelastic, or unit elastic? How do you know? . Suppose the LRATC remains downward sloping. From an economic efficiency standpoint, should a second ski lift be built? S ET R Natural Monopoly with Declining Costs 40 = 40.00 35 30 25 Price 20 15 10 Demand (D) Marginal Revenue [MR) 5 Marginal Cost [MC) Average Cost (AC] Deadweight Loss 20 40 60 80 100 Quantity