12.12. What is the fair-return price for a regulated natural monopoly and why is this more usual that the socially optimal price? 12.13. Give and explain an example of price discrimination in practice. 12.14. Explain why firms would want to price discriminate. 12.15. Why would the government want to regulate a natural monopolist rather than just break it up into smaller competing firms? 12.16. What are the major barriers to entry that explain the existence of monopoly? 12.17. Do you agree or disagree with the statement that: “A monopolist always charges the highest possible price.” Explain.
The Correct Answer and Explanation is:
12.12. What is the fair-return price for a regulated natural monopoly and why is this more usual than the socially optimal price?
Answer: The fair-return price is the price that allows a natural monopoly to cover its costs, including a normal profit (i.e., where price = average total cost).
Explanation: This pricing method ensures the firm stays in business by covering all costs, including capital, without earning excessive profit. The socially optimal price (where price = marginal cost) leads to greater efficiency but often results in losses because marginal cost is typically below average total cost in natural monopolies. Hence, fair-return pricing is more practical.
12.13. Give and explain an example of price discrimination in practice.
Answer: An example is airline ticket pricing.
Explanation: Airlines charge different prices for the same seat depending on when the ticket is bought, refundability, and customer type. This allows them to charge more to business travelers who book late and less to leisure travelers who book early, maximizing revenue.
12.14. Explain why firms would want to price discriminate.
Answer: To increase profits by capturing consumer surplus.
Explanation: By charging different prices to different consumers based on willingness to pay, firms can sell more units and extract more total revenue than with a single price.
12.15. Why would the government want to regulate a natural monopolist rather than just break it up into smaller competing firms?
Answer: Because splitting up a natural monopoly would lead to inefficiencies and higher costs.
Explanation: Natural monopolies have significant economies of scale. Breaking them up would increase average costs, making regulation a better solution to ensure fair pricing and service.
12.16. What are the major barriers to entry that explain the existence of monopoly?
Answer: High fixed costs, legal barriers, control of key resources, and economies of scale.
Explanation: These barriers prevent new competitors from entering, allowing one firm to dominate the market.
12.17. Do you agree or disagree with the statement: “A monopolist always charges the highest possible price.” Explain.
Answer: Disagree.
Explanation: A monopolist maximizes profit where marginal revenue equals marginal cost, not by charging the highest price. Charging too high a price would reduce quantity demanded and lower profits.
