Problem Set 2 - Joshua Friedman PAM 340 Problem Set#2...

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Joshua Friedman PAM 340 Problem Set #2 10.11.2007 1. The statement is FALSE. Economies of scale are not a necessary condition for a single-product natural monopoly, but they are efficient. Since it is cheaper for one firm to produce in this market than multiple firms, economies of scale will not affect the monopoly or the consumers. 2. The statement is TRUE. A two-part tariff is more efficient than linear pricing in the case of a single product monopolist because otherwise deadweight loss would be created. Using a two-part tariff gets rid of all DWL because the monopolist sets his price at a competitive level while keeping his profits. 3. The statement is FALSE. You want to raise price more with inelastic goods than with elastic goods to lower Deadweight Loss. With the elastic good, an increase in price causes the quantity of that good to be cut back a lot while an increase in price of the more inelastic good causes a less of a cutback.
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