Reference no: EM132488581

Natural Monopoly: Suppose that PG&E is a natural monopoly. PG&E faces the following inverse demand curve for monthly demand for gas: P=260- ¼ Q. Suppose its marginal and average variable costs are a constant $10 per kilowatt hour.

a) Find the profit maximizing quantity and price if this natural monopolist was not regulated.

P=260-1/4Q

MC=10

AVC=10

MR=260-1/2Q

MC=MR

10=260-1/2Q Q=500 -> P=1/4(500)-260 P=135

b) Draw a graph for the monopolist, showing the demand curve, the marginal revenue curve, and the profit-maximizing output and price.

c) Now suppose that the natural monopolist is regulated as to price and quantity. Assume that average fixed costs at Q(reg) is $30. Find Q(reg) and P(reg). Show your answers in the graph above.

MR=MC=P

@REG P=ATC

40=260-1/4Q

Q=880--> P=40