# Consider the local telephone company, a natural monopoly. The following graph shows the demand curve for…

Consider the local telephone company, a natural monopoly. The following graph shows the demand curve for phone services, the company’s marginal revenue curve (labeled MR), Its marginal cost curve (labeled MC), and its average total cost curve (labeled ATC). You can hover over the points on the graph to see their exact coordinates. PRICE (Dollars per month) 200 180 ATC 160 140 120 100 Demand 80 60 40 MC 20 MR – 0 6 12 18 24 30 36 42 48 54 60 QUANTITY (Thousands of households per monthl Assume no government regulation. If the natural monopoly provides the profit-maximizing output, it will provide phone services to households per month at a price of and earn a profit of per month. Suppose that the government forces the monopolist to set the price equal to marginal cost. In the short run, under a marginal-cost pricing regulation, the monopolist will provide phone services to households per month at a price of Under the marginal-cost pricing regulation, the firm will experience: A positive profit O An economic loss A profit of zero Suppose that the government forces the natural monopoly to set its price equal to average cost. Under an average-cost pricing policy, the monopolist would provide phone services to households per month at a price of and earn a profit of per month Under average-cost pricing, the government will raise the price of output whenever a firm’s costs increase and lower the price whenever a firm’s costs decrease. Over time, under the average cost pricing policy, the local telephone company will most likely: Work to decrease its costs Not work to decrease its costs