You work for an economic consulting firm that has been hired to provide some analysis on an industry that the government is considering regulating. Market demand for this industry is P = 10 - Q. Each firm has identical costs: C = q 2 +9. Marginal costs are MC = 2q. Note that Q = [ qi N 1. You have been tasked with determining how the cost structure influences market outcomes and suggest regulatory policy in terms of prices. Find the minimum efficient scale for the firms in the industry. For what range of output are these firms a natural monopoly? Plot the AVC, MC and AFC in a diagram using excel. Why would economists consider average cost pricing: P = AC, second-best-pricing. Use the diagram to explain when second-best pricing would be used by a regulator. What are the second-best price and quantity you would propose to the government? Be sure the market clear. At the regulated price determined above, could an entrant profitably enter by undercutting the incumbent firm? Explain how. Suppose that an entrant enters and produced at minimum efficient scale. In this case, the residual demand for the incumbent firm is PI = 10 - q mes - q I . What is the profit maximising output for the incumbent if its fixed costs are sunk? What if fixed costs are variable? In your response, define sunk costs and describe why they are important. For the case that where the incumbent's fixed costs are variable, determine the change in total surplus from entry. Assume that firms produce at minimum efficient scale. Is entry socially desirable? As the consultant, what are your recommendations to the government?