Solved: A Let s imagine that the firm with cost curves

illustrated
A Let s imagine that the firm with cost curves illustrated

a. Let’s imagine that the firm with cost curves illustrated in the left panel of the following figure
is a large cable TV provider. Assuming that the firm is free to maximize profit, find the profit-
maximizing price, quantity, and the firm’s profit.

b. Now assume that the firm is regulated and that the regulator sets the price so that the firm
earns a normal (zero) profit. What price does the regulator set and what quantity does the firm
sell? (Label this price and quantity on the diagram.)

c. Which price and quantity pair do consumers prefer, that in part a or b? Do consumers benefit
from price regulation?

d. Imagine that the cable TV provider can invest in fiber optic cable (high definition), better
programming, movie downloading, or some other service that increases the demand for the
product as shown in the right panel. If the firm were regulated as in part b, do you think it would
be more or less likely to make these investments?

e. Given your answer in part d, revisit the question of price regulation and make an argument
that price regulation could harm consumers once you take into account dynamic factors. Would
this argument apply to all consumers or just some? If so, which ones?

A Let s imagine that the firm with cost curves illustrated

ANSWER
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