Reference no: EM131651019

1. Many identical small plants that each have zero fixed costs but relatively high, constant marginal cost

2. One large geothermal plant that has high fixed costs but extremely low marginal cost

(a). Sketch a diagram to help explain what would be the likely current price, quantity, profit and consumer surplus if Arisen Island is served by Option 1.

(b). Sketch a diagram to help explain how the Minister of Energy could be correct that prices could be lower and quantity and consumer surplus could be higher even with positive monopoly profits.

(c). Suppose that you also have a very clever Minister of the Economy who shows you a policy that could be applied to the monopolist in Option 2 that would help the reduce the price and increase the quantity sold and consumer surplus.

Explain what this clever policy would be and show on your diagram from part b) what level it should be set at. Ensure to explain what the price, quantity, consumer surplus and profits are under this policy compared to what the monopolist chose in part b).