A natural monopoly is producing electricity has the following total costs: TC = 100 + 6Q
a. Find MC and AC and graph them.
b. Market demand is P = 96 – 9Q. How much will this firm produce assuming there is no government intervention in the market? What will be market price? Add demand and MR to your graph.
c. Calculate the firm’s profit and mark it on your graph.
d. Let the production of electricity produce pollution with constant external costs of $20. Add the social marginal costs to your graph and show the socially optimal quantity and price. Should the government intervene in this market? Why or why not?
ScholarMatic: Explanation & Answer
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