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Consider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services, the company's marginal-revenue (MR), marginal-cost (MC), and average-total-cost (ATC) curves. PRICE (Dollars per subscription) ------- --- ATC MC O HUMRU 0 2 4 6 8 10 12 14 16 18 QUANTITY (Thousands of subscriptions) D 20 Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints. 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. Quantity (Subscriptions) Short Run Price (Dollars per subscription) Profit Long-Run Decision Pricing Mechanism Profit Maximization Marginal-Cost Pricing Average-Cost Pricing Suppose that the government forces the monopolist to set the price equal to marginal cost. Complete the second row of the previous table. Suppose that the government forces the monopolist to set the price equal to average total cost. Complete the third row of the previous table. True or False: Over time, the cable company has a very strong incentive to lower costs when subject to average-cost pricing regulations. True O False
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