The market for electricity in Hamsterville is a natural monopoly. The government of Hamsterville wants to regulate Cricetidae Lighting and Power, the sole producer of electricity in Hamsterville. The government wants to set a price that reduces deadweight loss but doesn't want to have to subsidize the firm to keep it in business. The firm's cost curves and demand are shown here.

What price should regulators set and what quantity will be sold?
Choose 1 answer:
(A) $P_{3}, Q_{1}$
(B) $P_{4}, Q_{1}$
(C) $P_{2}, Q_{1}$
(D) $P_{2}, Q_{2}$
(E) $P_{1}, Q_{3}$

Question

The market for electricity in Hamsterville is a natural monopoly. The government of Hamsterville wants to regulate Cricetidae Lighting and Power, the sole producer of electricity in Hamsterville. The government wants to set a price that reduces deadweight loss but doesn't want to have to subsidize the firm to keep it in business. The firm's cost curves and demand are shown here.

What price should regulators set and what quantity will be sold?
Choose 1 answer:
(A) $P_{3}, Q_{1}$
(B) $P_{4}, Q_{1}$
(C) $P_{2}, Q_{1}$
(D) $P_{2}, Q_{2}$
(E) $P_{1}, Q_{3}$

Accepted Answer

∻Solution∻ ‖ a ⋮ Identifying the Natural Monopoly: A natural monopoly occurs when a single firm can supply the entire market at a lower cost than any combination of multiple firms. This is typically due to high fixed costs and economies of scale. ‖ ‖ b ⋮ Understanding the Graph: The graph shows the cost curves (MC, ATC) and demand curves (D, MR) for Cricetidae Lighting and Power. The intersection points of these curves help determine the optimal price and quantity. ‖ ‖ c ⋮ Setting the Price to Reduce Deadweight Loss: To reduce deadweight loss without subsidizing the firm, regulators should set the price where the firm can cover its average total cost (ATC). This occurs at the intersection of the ATC and MC curves, which aligns with $P_{2}$ on the y-axis and $Q_{2}$ on the x-axis. ‖ ‖ d ⋮ Conclusion: Therefore, the regulators should set the price at $P_{2}$ and the quantity at $Q_{2}$. This ensures the firm covers its costs and reduces deadweight loss. ‖ ∻Answer∻ ⚹ (D) $P_{2}, Q_{2}$ ⚹ ∻Key Concept∻ ⚹ Natural Monopoly Pricing ⚹ ∻Explanation∻ ⚹ In a natural monopoly, setting the price where the firm covers its average total cost (ATC) ensures that the firm remains in business without requiring subsidies, while also reducing deadweight loss. ⚹◊What is the formula to calculate deadweight loss in a market?⍭ Generate me a similar question◊

Sia