(Solved): 9. Regulating a natural monopoly Consider the only internet service provider in a small town, wh ...

9. Regulating a natural monopoly Consider the only internet service provider in a small town, which you can assume operates as a natural monopoly. The following graph shows the demand curve for internet services per month, as well as the provider's marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. Suppose the government has elected not to impose regulations on the industry, and so the firm faces no regulatory constraints in maximizino profits. Complete the first row of the following table. Suppose now that the government decides to require the monopolist to set its price equal to maroinal cost. Complete the second row of the previous table. Suppose now that the government decides to require the monopolist to set its price equal to average total cost. Complete the third row of the previous table. 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, what will the local internet service provider most likely do? Work to decrease its costs Allow its costs to increase \begin{tabular}{lcccc} \cline { 2 - 5 } & \multicolumn{1}{c}{ Short Run Puantity (Subscriptions) } & Price (Dollars per subscription) & Profit & Long-Run Decision \\ \hline Profit Maximization & \( \frac{8,000}{} \) & Negative \\ Marginal-Cost Pricing \end{tabular} Suppose now that the government decides to require the monopolist to set its price equal to marginal Stay or exit