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1. Suppose that production requires only capital and labor (proportions can be varied) and that capital is fixed and sunk in the short run.
(a) For the case of a strong natural monopoly, graph the firm's short- and long-run average and marginal cost curves when price equals long-run marginal cost. Follow the usual convention of counting the firm's sunk capital costs as a short-run fixed cost.
(b) In the short run what is the efficient price? Why? Would it ever differ from the long-run efficient price? Why?
(c) At the long-run efficient price, does the firm recover any or all of its capital expenditures? Why?
(d) At the long-run efficient price, would the firm ever recover all of its short-run variable costs? Explain.
(e) Is it ever possible that a strong natural monopolist would at least break even in the short run if it priced efficiently? Would that price be efficient in the long run? Explain.
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