A company is considering building a bridge across a river

• A monopolist often can raise its profits by charg- ing different prices for the same good based on a buyer's willingness to pay. This practice of price discrimination can raise economic welfare by getting the good to some consumers who otherwise would not buy it. In the extreme case of perfect price discrimination, the deadweight loss of monopoly is completely eliminated, and the entire surplus in the market goes to the monopoly producer. More generally, when price discrimination is imperfect, it can either raise or

1. Give an example of a government-created monopoly. Is creating this monopoly necessarily bad public policy? Explain.

2. Define natural monopoly. What does the size of a market have to do with whether an industry is a natural monopoly? Why is a monopolist's marginal revenue less than the price of its good? Can marginal revenue ever be negative? Explain. Draw the demand, marginal-revenue, average- total-cost, and marginal-cost curves for a monopolist. Show the profit-maximizing level of output, the profit-maximizing price, and the amount of profit.

A publisher faces the following demand schedule for the next novel from one of its. popular authors:

Price Quantity Demanded

$100 90 80 70 60 50 40 30 20 10 0

0 novels 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000

1,000,000

'

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lower welfare compared to the outcome with a single monopoly price.

• Policymakers can respond to the inefficiency of monopoly behavior in four ways. They can use the antitrust laws to try to make the industry more competitive. They can regulate the prices that the monopoly charges. They can turn the monopolist into a government-run enterprise. Or if the market failure is deemed small compared to the jnevitable imperfections of policies, they can do nothing at all.

5. In your diagram from the previous question, show the level of output that maximizes total surplus. Show the deadweight loss from the monopoly. Explain your answer.

6. Give two examples of price discrimination. In each case, explain why the monopolist chooses to follow this business strategy.

7. What gives the government the power to regulate mergers between firms? From the standpoint of the welfare of society, give a good reason and a bad reason that two firms might want to merge.

8. Describe the two problems that arise when regulators tell a natural monopoly that it must set a price equal to marginal cost.

The author is paid $2 million to write the book, and the marginal cost of publishing the book is a constant $10 per book. a. Compute total revenue, total cost, and profit

at each quantity. What quantity would a profit-maximizing publisher choose? What price would it charge?

b. Compute marginal revenue. (Recall that MR = A.TR/ A.Q.) How does marginal revenue compare to the price? Explain.

c. Graph the marginal-revenue, marginal-:cost, and demand curves. At what quantity do the marginal-revenue and marginal-cost curves cross? What does this signify?

326 PARTV FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY

d. In your graph, shade in the deadweight loss. Explain in words what this means.

e. If the author were paid $3 million instead of $2 million to write the book, how would this affect the publisher's decision regarding what price to charge? Explain.

f. Suppose the publisher was not profit- maximizing but was concerned with maxi- mizing economic efficiency. What price would it charge for the book? How much profit would it make at this price?

2. A small town is served by many competing supermarkets, which have the same constant marginal cost. a. Using a diagram of the market for groceries,

show the consumer surplus, producer surplus, and total surplus.

b. Now suppose that the independent super- markets combine into one chain. Using a new diagram, show the new consumer surplus, producer surplus, and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the deadweight loss?