Question

consider the local cable company, a natural monopoly. the following graph shows the monthly demand curve for cable services and the companys marginal revenue (mr), marginal cost (mc), and average total cost (atc) curves. suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits without constraints. complete the first row of the following table. pricing mechanism quantity (subscriptions) price (dollars per subscription) profit long - run decision profit maximization marginal cost pricing average cost pricing

Explanation:

Step1: Recall profit - maximizing condition

A monopolist maximizes profit where $MR = MC$. From the graph, the quantity at which $MR$ intersects $MC$ is 6000 subscriptions (6 on the x - axis where quantity is in thousands).

Step2: Find the price

Go up from the quantity of 6000 subscriptions to the demand curve $D$ and then across to the y - axis. The price per subscription is $60$.

Step3: Calculate profit

Profit = $(P - ATC)\times Q$. At $Q = 6000$, $P=60$ and from the graph, $ATC\approx25$. So profit = $(60 - 25)\times6000=35\times6000 = 210000$.

Step4: Determine long - run decision

Since the firm is making a positive profit, in the long - run, it will continue to operate.

Answer:

Pricing Mechanism	Quantity (Subscriptions)	Price (Dollars per subscription)	Profit	Long - Run Decision