econ ch 12

1. It has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices, and then government should tax their profits away and distribute them to consumers in proportion to their purchases from the monopoly. Is this proposal as socially desirable as requiring monopolists to equate price with marginal cost or average total cost? Explain.

No, it does not consider that the output of natural monopolists would still be at the suboptimal level where P > MC.

The socially optimal price (P = MC) is socially optimal because

achieves allocative efficiency

A pure monopolist is producing an output such that ATC = $10, P = $12, MC = $8, MR = $7, and AVC = $6. This firm is realizing

an economic profit that could be increased by producing less output

The MR curve of a perfectly competitive firm is horizontal. The MR curve of a monopoly firm is:

downward sloping

If a pure monopolist is producing at that output where P=ATC, then

economic profits will be 0

In the long run, a pure monopolist will maximize profits by producing that output at which marginal cost is equal to

marginal revenue

The main problem with imposing the socially optimal price (P = MC) on a monopoly is that the socially optimal price:

may be so low that the regulated monopoly can't break even

Suppose that a monopolist can segregate his buyers into two different groups to which he can charge two different prices. To maximize profit, the monopolist should charge a higher price to the group that has

the lower elasticity of demand

A pure monopolist

will realize an economic profit if price exceeds ATC at the profit-maximizing/loss-minimizing level of output