Problem Set 9 (75 points) 1. A student argues, "If a monopolist finds a way of producing a good at lower cost, he will not lower his price. Because he is a monopolist, he will keep the price and the quantity the same and just increase his profit." Do you agree? Use a graph to illustrate your answer. The argument is incorrect. As the graph shows, a reduction in marginal cost will cause a monopolist to reduce his price.

2. Economist Harvey Leibenstein argued that the loss of economic efficiency in industries that are not perfectly competitive has been understated. He argued that when competition is weak, firms are under less pressure to adopt the best techniques or to hold down their costs. He referred to this effect as "x-inefficiency." If x-inefficiency causes a firm's marginal costs to rise, show that the deadweight loss in Figure 10.10 understates the true deadweight loss caused by a monopoly. If the monopoly were more efficient, its marginal costs would fall—from MC1 to MC2 in the figure. As the figure shows, if a monopoly has higher costs (MC1) because it does not face competition, then the true deadweight loss is increased. The darker shaded area shows the original deadweight loss as it was in Figure 10.10. The lighter shaded area shows the additional deadweight loss from taking into account x-inefficiency—that is, from the firm not producing more efficiently, at quantity QCX.

3. Use the following graph for a monopoly to answer the questions.

a. What quantity will the monopoly produce, and what price will the monopoly charge?

To maximize profits, the monopoly will produce the quantity where marginal revenue equals marginal cost. So, the monopoly will produce 20 units and charge a price of $30. b. Suppose the government decides to regulate this monopoly and imposes a price ceiling of $18 (in other words, the monopoly can charge less than $18 but