local telephone company is a natural monopoly because it enjoys economies of scale in production. You can assume that the marginal cost of providing additional telephone services is constant. The telephone company currently charges only one price for telephone calls to all its customers. PART A: Use a diagram to illustrate the situation described above. Your diagram should show the quantity supplied, price charged and the profit made by the monopolist (2 marks). PART B: How is the output of the monopoly different from what it would be if the telephone industry was perfectly competitive? What is the deadweight loss? Illustrate your answer with a diagram (2 marks). PART C: The telephone company is lobbying the government to allow it to engage in price discrimination so that it can charge three different prices: one for rich consumers, one for middle income consumers and one for poor consumers. Consumer advocate groups are concerned that this change in pricing would increase the profits of the monopoly company and disadvantage consumers. But the company says that low income consumers would be better off because they would receive lower prices if the company could engage in price discrimination. Discuss (and illustrate with diagrams) how allowing price discrimination would effect: i) the profits of the telephone company; (1 mark) ii) low income consumers; Will they be better off? Why or why not? (1 mark) iii) rich consumers; Will they be better off? Why or why not? (1 mark) iv) the deadweight loss from the monopoly. (1 mark) PART D: The company is supporting its case for price discrimination by claiming that they are barely breaking even in the current situation of charging only one price to all customers. i) Is it possible for a monopoly that is charging only one price to be breaking even and making zero economic profits even if it is a price maker? Illustrate your answer with a diagram. (1 mark) ii) Discuss and illustrate how allowing price discrimination would affect the telephone company in this case (assuming they are currently breaking even). (1 mark)   Click here for more on this paper.......