After a lengthy legal battle with the government ATT agreed to compete with

# After a lengthy legal battle with the government att

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After a lengthy legal battle with the government, AT&T agreed to compete with other companies in the long-distance market. It also agreed to spin off its local phone service into the "Baby Bells," which remain highly regulated. o c. Why might it be efficient to have competition in long-distance phone service and regulated monopolies in local phone service? 2.Consider the relationship between monopoly pricing and price elasticity of demand: a. Explain why a monopolist will never produce a quantity at which the demand curve is inelastic. (Hint: If demand is inelastic and the firm raises its price, what happens to total revenue and total costs?) b. Draw a diagram for a monopolist, precisely labeling the portion of the demand curve that is inelastic. (Hint: The answer is related to the marginal-revenue curve.) 5
c. On your diagram, show the quantity and price that maximizes total revenue. 2.If the government wanted to encourage a monopoly to produce the socially efficient quantity, should it use a per-unit tax or a per-unit subsidy? Explain how this tax or subsidy would achieve the socially efficient level of output. Among the various interested parties–the monopoly firm, the monopoly's consumers, and other taxpayers–who would support the policy and who would oppose it? 3. You live in a town with 300 adults and 200 children, and you are thinking about putting on a play to entertain your neighbors and make some money. A play has a fixed cost of \$2,000, but selling an extra ticket has zero marginal cost. Here are the demand schedules for your two types of customer: Price Adults Children \$10 0 0 9 100 0 8 200 0 7 300 0 6 300 0 5 300 100 4 300 200 3 300 200 2 300 200 1 300 200 0 300 200 a. To maximize profit, what price would you charge for an adult ticket? For a child's ticket? How much profit do you make? b. The city council passes a law prohibiting you from charging different prices to different customers. What price do you set for a ticket now? How much profit do you make? c. Who is worse off because of the law prohibiting price discrimination? Who is better off? (If you can, quantify the changes in welfare.) 6
d. If the fixed cost of the play were \$2,500 rather than \$2,000, how would your answers to parts (a), (b), and (c) change? 2. Based on market research, a recording company obtains the following information about the demand and production costs of its new CD: where Q indicates the number of copies sold and P is the price in cents. a. Find the price and quantity that maximizes the company's profit. b. Find the price and quantity that would maximize social welfare. c. Calculate the deadweight loss from monopoly. d. Suppose, in addition to the costs above, the musician on the album has to be paid. The company is considering four options: A a i. A flat fee of 2,000 cents A b

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