question archive 1)Suppose a natural monopolist has fixed costs of $15 and a constant marginal cost of $3
1)Suppose a natural monopolist has fixed costs of $15 and a constant marginal cost of $3
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1)Suppose a natural monopolist has fixed costs of $15 and a constant marginal cost of $3. The demand for the product is as follows:
| Price (per unit) | $10 | $9 | $8 | $7 | $6 | $5 | $4 | $3 | $2 | $1 |
| Quantity demanded (units per day) | 0 | 2 | 4 | 6 | 8 | 10 | 12 | 14 | 16 | 18 |
Under these conditions:
a. What price and quantity will prevail if the monopolist isn't regulated?
b. What price-output combination would exist (MC=p)(MC=p),
c. What price-output combination would exist with profit regulation (zero economics profit)? Illustrate your answers.
2)The Telecommunications Act of 1996 requires local phone companies to charge "reasonable" rates for transmission access. What is a "reasonable" rate?
3)Which of the following best represents a public good?
a. Cable TV,
b. Interstate highway,
c. Preparatory private high school,
d. The Florida turnpike,
e. The Mall.
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1)
| Price (per unit) | $10 | $9 | $8 | $7 | $6 | $5 | $4 | $3 | $2 | $1 |
| Quantity demanded (units per day) | 0 | 2 | 4 | 6 | 8 | 10 | 12 | 14 | 16 | 18 |
| Total Revenue | 0 | $18 | $32 | $42 | $48 | $50 | $48 | $42 | $32 | $18 |
| Marginal Revenue | 0 | $18 | $14 | $10 | $6 | $2 | -$2 | -$6 | -$10 | -$14 |
| Total Costs | $15 | $21 | $27 | $33 | $39 | $45 | $51 | $57 | $63 | $69 |
| Marginal Cost per Unit | 0 | $3 | $3 | $3 | $3 | $3 | $3 | $3 | $3 | $3 |
a. What price and quantity will prevail if the monopolist isn't regulated?
Any competitor, whether or not a monopolist, must produce enough to cover costs. The point of profit maximization occurs where marginal revenue equals marginal cost. From the table, it looks like that occurs at the output of 8 units. The total revenue is $48, the marginal revenue is $6, and the marginal cost is $3.
b. What price-output combination would exist if MC=p?
The marginal cost is $3 per unit. If the price was also $3 per unit, the quantity demanded would be 14 units.
c. What price-output combination would exist with profit regulation (zero economics profit)? Illustrate your answers.
As the table above illustrates, the zero economic profit is where the marginal revenue exactly covers the marginal cost at 14 units.
2)The objective of The Telecommunication Act of 1996 was to promote competition in the telecom industry. It allowed new companies to enter the business and compete with existing firms. Therefore, by promoting competition in the telecom industry, the Telecommunication Act will ensure reasonable transmission access rates. As the competition started increasing, transmission access rates started moving towards 'reasonable rates' where firms can earn only normal profit.
3)The correct answer is B interstate highway. These are the free highway stretching in each direction across all states in America. These highways are built by the government to be used by the public irrespective of their residents. Besides, their usage by an individual does not reduce the ability of other people to use it. Moreover, they are serviced by the government through the taxes paid by the public.
