- 10 For Many Decades The Royal Mail Had A Legal Monopoly In The U K Companies In The Postal Business Have Increasing R 1 (147.61 KiB) Viewed 46 times
10. For many decades, the Royal Mail had a legal monopoly in the U.K. Companies in the postal business have increasing returns to scale, then constant returns to scale, and then decreasing returns to scale. The Royal Mail's minimum average cost is £2 at 100 million deliveries and its minimum marginal cost is £1 at 75 million deliveries. The demand for postage is zero at a price of £10, and demand is 300 million deliveries at a price of £0. Marginal revenue is zero at a price of £10 and 150 at a price of £0. Note: Unless otherwise stated, the numerical answers in this question do not need to be exact but should correspond to how you have drawn your graph. (a) Draw a large graph showing the Royal Mail's average cost curve and its marginal cost curve. Show how many deliveries would be made, and at what price, if Royal Mail operated as a monopoly. Show the Royal Mail's profit or loss on the graph. [5 Marks] (b) The government makes a law restricting the price of postage to £1. Show the effect of this policy in the short-run in a new, large graph. The graph should show the firm's average cost, marginal cost, marginal revenue, and consumer demand. How much postage is bought? Show on your graph if the Royal Mail is in profit or loss, and by how much. [5 Marks] (c) New technology changes delivery firms' technology. Now, the minimum average cost is £2 at 1 million deliveries and a minimum marginal cost of £1 at 0.75 million deliveries. The government removes all price restrictions and allows free entry. Describe the long-term outcome for this market, using two graphs, one at the firm-level and one at the market-level. How many firms will be operating in the long-run? Note: a precise answer is possible for this question. [5 Marks)