Provide an example of a cost function for which a natural monopoly exists. Why might we want to allow natural monopolies to exist (e.g. how might social welfare benefit from such a monopoly)?

Figure 3. P, Costs 20 15 50 40 30 30 40 45 MR D MC ATC Q

Suppose a monopolist could charge a different price to every customer based on how much he or she were willing and able to pay (versus charging the same price to all their customers). How would this affect the monopolist's profits? Why?

Consider the welfare effects when the industry operates under a competitive market versus a monopoly. On the monopoly graph, use the black points (plus symbol) to shade the area that represents the loss of welfare from a monopoly, or deadweight loss. That is, show the area that was formerly producer surplus or consumer surplus and now does not accrue to anybody. Deadweight loss occurs when a monopoly controls a market because the resulting equilibrium is different from the competitive outcome, which is efficient. In the following table, enter the price and quantity that would arise in a competitive market; then enter the profit-maximizing price and quantity that would be chosen if a monopolist controlled this market. Market Structure Price Quantity (Dollars) (Hot dogs) Competitive     Monopoly       Given the summary table of the two different market structures, you can infer that, in general, the price is higher under a (competitive market or…