Lesson 03.08 Regualing monopolies

Lesson 03.08 Regualing monopolies - Lesson 03.08 Regulating...

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Lesson 03.08 Regulating Monopolies 1. The electrical monopolist’s profit maximizing price and output level is determined at where Marginal Revenue equals Marginal Cost (MR=MC). For the price, however, it continues until it reaches the demand curve, instead of where MR=MC. On the graph, consumer surplus is located above the monopoly price (P m ) and below the Demand curve. Producer surplus is located below the monopoly price (P m ) and above the Marginal cost (MC) curve. The deadweight loss is located in the blue shaded area on the graph. The monopolist has lost his producer surplus to the deadweight loss and the consumer loses his/her surplus to the deadweight loss as well. 2. Because of the regulation, the electrical monopolist’s profit maximizing price and output level is determined at where the Average Total Cost curve intersects with the Demand curve (ATC=D). This is known as the Fair return price and at this price the firm is breaking even (Total Revenue=Total Cost). The profit maximizing price and output level could also be
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Lesson 03.08 Regualing monopolies - Lesson 03.08 Regulating...

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