Question

1. Assume the government regulates a natural monopoly by setting a price ceiling equal to their marginal cost. (2 pts.)
   1. What issue does this cause the monopoly?
2. 2. What is a solution the monopoly can implement to overcome the issue?

Answer 1

Answer a : The issues related to natural monopoly are :

• Natural monopoly is a single firm can supply goods and services to an entire market at smaller cost.
• When there are economics of scale that has been achieved.

b : Monopoly has charged higher price in order to grab maximum profit. But government has been regulated the monopoly by price ceiling or regulating the price.But natural monopoly exist when there is economics of scale and higher fixed up settings cost.Monopoly company tries policies such as lower the output and when demand is more than supply price automatic increases.