We're working on Eh-Llie's mobile experience! Right now, experience Eh-Llie on your desktop.
We're working on Eh-Llie's mobile experience! Right now, experience Eh-Llie on your desktop.
Natural monopolies may be regulated by the Government to improve allocative efficiency.
On Graph One above, show the impacts of the Government regulating the natural monopolist to operate at marginal cost pricing by:
On Graph Two on page 2, show the impacts of the Government regulating the natural monopolist to operate at average cost pricing by:
In Table One below, identify the type of economic profit made by the natural monopolist operating under a marginal cost pricing regulation and an average cost pricing regulation set by the Government.
Compare and contrast the impacts of a marginal cost pricing regulation and an average cost pricing regulation on consumers, the natural monopolist, the Government, and allocative efficiency. In your answer refer to Graph One, Graph Two, and Table One, and explain:
The effect of each of the two pricing regulations on consumer surplus and allocative efficiency.
The effect of each of the two pricing regulations on the natural monopolist’s profit and the Government.
In recent years, low interest rates made it easier for firms to repay their loans, resulting in lower fixed costs. The size of fixed cost reductions differs between firms. Those with larger loans tend to experience bigger reductions.
Firm A and Firm B are earning a short run subnormal profit in a perfectly competitive market structure.
On Graph Three above, show how lower interest rates might lead to the individual firm with a larger loan (Firm A) earning a supernormal profit. Label any curve shift(s), and shade in the supernormal profit.
On Graph Four above, show how lower interest rates might lead to the individual firm with a smaller loan (Firm B) earning a reduced amount of subnormal profit. Label any curve shift(s), and shade in the subnormal profit.
Compare and contrast how the varying decreases in fixed costs might impact the output level and the type of economic profit made by individual firms in the perfect competition market structure. In your answer refer to Graph Three and Graph Four and explain:
What fixed costs are, and their impact on Firm A’s and Firm B’s cost curves.
Why, while Firm A earns a supernormal profit but Firm B earns a subnormal profit, the output level remains the same for both firms.
Despite the low interest rates, many firms like Firm B have continued to make subnormal profits.
On Graph Five above, show how the market will react to the subnormal profit in the long run. Label any curve shifts, and changes in the market equilibrium price (P2) and quantity (Q2).
On Graph Six above, show how the long run change in the market will affect the long run profit maximising equilibrium for the individual firm. Label any curve shifts, and changes in the profit maximising price (Plr) and quantity (Qlr).
Explain the long run profit situation for the individual firm. Refer to Graph Five, Graph Six, and the characteristics of perfect competition.
COVID-19 and border restrictions have resulted in many firms facing higher freight costs. Freight costs are a variable cost.
Graph Seven above shows a monopoly making a supernormal profit. A new average cost curve (AC1) has been added for you.
Complete the graph by:
Using marginal analysis, explain what output decision the monopolist might make following an increase in their variable costs. Refer to Graph Seven in your answer.
Graph Eight above shows a monopoly making a supernormal profit with an increase in demand. A new average revenue curve (AR1) has been added for you.
Complete the graph by:
Compare and contrast the impacts of increased variable costs with increased demand on the monopoly’s long run profitability. Refer to Graph Seven, Graph Eight, and the characteristics of a monopoly in your answer and explain: