Profit maximizing behavior of natural monopoly.
Natural Monopoly: The following table depicts the cost and demand structure a natural monopoly faces.
Output
Price
Total Costs
0
$100
$0
1
$95
$92
2
$90
$177
3
$85
$255
4
$80
$331
5
$75
$406
6
$70
$480
(a) Compute total revenue, marginal revenue, marginal cost, and average total cost of this natural monopoly.
(b) What is the profit maximizing output and price for this natural monopoly if the government does not regulate it?
(c) Assuming total costs include all implicit costs (including a fair rate of return for shareholders), what price and output will the government set for the natural monopoly.
(d) Describe the characteristics of a natural monopoly and how a natural monopoly differs from other monopolies? (Hint: Compare the numerical patterns in the tables above and your calculations in 3(a) and 4(a))