ECON205 - Homework11 - S09

# ECON205 - Homework11 - S09 - t~'7 Natural monopoly analysis...

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". t~. '7 Natural monopoly analysis ~ '/ The graph below shows the demand for cable TV services in a particular town. The graph also shows the marginal revenue (MR) curve, the marginal cost (MC) curve, and the long-run average total cost (LRATC) curve for the local cable TV company, a natural monopolist. DOLLARS (Dollars per subscription) QUANTITY (Number of subscriptions) The natural monopolist will maximize profit by choosing a price of Explanation: P3 " and a quantity of Ql " . Close A A natural monopolist chooses its quantity of production by setting marginal revenue equal to marginal cost, which in this case corresponds to a quantity of Q1. The natural monopolist will then charge the maximum price that it can charge, P3, which is the price on the demand curve that corresponds to a quantity of Q1. If the government wants to pursue efficiency, it should set the price for cable subscriptions at price regulation and without a government subsidy, the cable company will exit long run. Explanation: Pl " . With this " in the Close A Efficiency requires that price equal marginal cost, a condition given by the intersection of the demand and marginal cost curves. When price is Pl, the value to consumers of another cable subscription equals the marginal cost of an additional subscription. Note that at this price, cable companies would be operating at an economic loss and would therefore exit in the long run. Because this regulatory pricing policy causes firms to make negative profit, the firm would choose to exit in the long run. .J~" .dJ4 < r phil nc II n ~ S ~, r ~ r 1 I I e< Points: 4 Average: 4/4

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2. Externalities I Suppose a grocer sells a pound of flour to a family that uses it to bake bread. Which of the following is true? ,,@ This will not generate any externalities. o This will generate a positive externality. o This will generate both positive and negative externalities. o This will generate a negative externality. Explanation: Close A This is a purely private transaction between a grocer and a family. No one else is affected, so no externalities are associated with this activity. Points: Average: 1 / 1
3. Externalities II Suppose the city builds a garbage dump next to Deborah's house. Which one of the following is true of the unpleasant odors and garbage truck noise? o They will generate a positive externality. o They will not generate any externalities. @ They will generate a negative externality. o They will generate both positive and negative externalities. Explanation: g' Close A Having a garbage dump next to her house will impose negative externalities on Deborah. Garbage creates unpleasant smells, and garbage trucks create a lot of noise. These are negative externalities associated with the garbage dump.

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ECON205 - Homework11 - S09 - t~'7 Natural monopoly analysis...

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