Question

City gas is a natural monopoly that supplies natural gas to a particular city. its cost and demand information are given below. quantity (millions of therms) price ($ per therm) total cost (million $) 1 48 35 2 44 64 3 38 90 4 30 113 5 20 133 6 8 150 if the government decides to regulate this natural monopoly by forcing them to produce at the point where the demand curve intersects marginal cost, then the firm will make a ____ and ____ continue in the long run.

Answer 1

Answer:

if the government decides to regulate this natural monopoly by forcing them to produce at the point where the demand curve intersects marginal cost, then the firm will make a LOSS OF $33 MILLION and WILL NOT continue in the long run.

Explanation:

When the production output increases from 4 to 5 million therms, the marginal cost of production is $20 million (= 133 - 113) and the marginal revenue is also $20. At this point, the company will be maximizing its accounting profit and its economic profit will be $0

The accounting profit/loss will = $100 million - $133 million = -$33 million