QUESTIONS FOR REVIEW

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?

3. Why is a monopolist’s marginal revenue less than the price of its good? Can marginal revenue ever be negative? Explain.

4. Draw the demand, marginal-revenue, and marginal-cost curves for a monopolist. Show the profit maximizing level of output. Show the profit-maximizing price.

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. 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.

7. Describe the two problems that arise when regulators tell a natural monopoly that it must set a price.

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