Consider a natural monopoly with declining average costs summarized by the equation AC = 16/Q + 1, where AC is in dollars and Q is in millions of units. (The total cost function is C = 16 + Q.) Demand...

Consider a natural monopoly with declining average costs summarized
by the equation AC = 16/Q + 1, where AC is in dollars and Q is in
millions of units. (The total cost function is C = 16 + Q.) Demand for
the natural monopolist’s service is given by the inverse demand equation
P = 11 - Q.

a. Determine the price and output of the unregulated natural


monopolist.


b. Suppose a regulator institutes average-cost pricing. What is the


appropriate price and quantity?


c. Answer part (b) assuming the regulator institutes marginal-cost


pricing. What is the enterprise’s deficit per unit of output? How might


this deficit be made up?