Exhibit 15-4

-The firm in Exhibit 15-4 is a natural monopoly.If it is regulated so that it earns only a normal profit,the consumers experience a consumer surplus of:

Question

Exhibit 15-4
 
-The firm in Exhibit 15-4 is a natural monopoly.If it is regulated so that it earns only a normal profit,the consumers experience a consumer surplus of:

Quizplus · Accepted Answer

Under normal profit regulation, the firm will produce at the point where marginal cost (MC) intersects with the average cost (AC) curve. In this case, the output level will be 70 units and the price will be $32. Consumer surplus can be calculated as the area between the demand curve and the price line up to the quantity consumed, which in this case is (1/2) x $32 x 70 = $1,120. However, since the firm is a natural monopoly, it will still face economies of scale and may have higher costs than a perfectly competitive market. Therefore, some argue that a regulated price equal to average total cost would still allow the firm to earn a normal profit while avoiding inefficiencies associated with monopoly power.

Exhibit 15-4 -The Firm in Exhibit 15-4 Is a Natural Monopoly.If It