consider the only electric company in a small town which you can assume operates as a natural monopoly the following graph shows the demand curve for electricity services per month as well a 62984

Consider the only electric company in a small town, which you can assume operates as a natural monopoly. The following graph shows the demand curve for electricity services per month, as well as the provider's marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. 90 80 70 60 (Dollars per subscription) 50 PRICE 30 10 6,60 MRI 6 10 12 14 20 QUANTITY (Thousands of subscriptions) Suppose the government has elected not to impose regulations on the industry, and so the firm faces no regulatory constraints in maximizing profits. Complete the first row of the following table. Short Run price Quantity Pricing Mechanism (Subscriptions) (Dollars per subscription) Proflt Max!mization 6,000 40 V Marginal-Cost Pricing 11,000 30 V Average-Cost Pricing 12,000 Profit Negative Long-Run Decision Stay in business V Exit the industry Positive Zero Stay or exit 30 Suppose now that the government decides to require the mo to set its price equal to marginal cost. 35 Complete the second row of the previous table 40 Suppose now that the government decides to require the mo 60 to set its price equal to average total cost. Complete the third row of the previous table. Under average-cost pricing, the government will raise the price of output whenever a firm's costs increase, and lower the price whenever a firm's costs decrease. Over time, under the average-cost pricing policy, what will the local electric company most likely do? O Allow its costs to increase O Work to decrease its costs

The graph on the right shows the average total cost curve for a firm. How would the cost differ if the market consisted of only one large firm compared to a market with many small firms? Consider the combination that would exist if there was one large monopoly producing 80 units. Label your point "Monopoly". Consider the combination that would exist if this was the ATC curve for one of many firms where each firm produces 20 units. Label your point "Competition". Carefully follow the instructions above and only draw the required objects. Using the graph, a firm with that type of cost curve is best suited to be: A. A competitive firm, since it faces economies of scale which gives it an advantage over small competitive firms. B. A competitive firm, since it faces diseconomies of scale which gives it an advantage over small competitive firms. C. A natural monopoly, since it faces economies of scale and can produce at a lower cost if done by one firm. D. A monopoly based on legal market power, since it faces diseconomies of scale and can produce at a lower cost if done by one firm. ATC 10 20 30 40 50 60 70 80 90 100 Quantity

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