Check Your Understanding

1. Question

   What policy should the government adopt in the following cases? Explain.

   1. Internet service in Anytown, OH, is provided by cable. Customers feel they are being overcharged, but the cable company claims it must charge prices that let it recover the costs of laying cable.

   2. The only two airlines that currently fly to Alaska need government approval to merge. Other airlines wish to fly to Alaska but need government-allocated landing slots to do so.

2. Question

   True or false? Explain your answer.

   1. Society’s welfare is lower under monopoly because some consumer surplus is transformed into profit for the monopolist.

   2. A monopolist causes inefficiency because there are consumers who are willing to pay a price greater than or equal to marginal cost but less than the monopoly price.

3. Question

   Suppose a monopolist mistakenly believes that his or her marginal revenue is always equal to the market price. Assuming constant marginal cost and no fixed cost, draw a diagram comparing the level of profit, consumer surplus, total surplus, and deadweight loss for this misguided monopolist compared to a smart monopolist.