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1. Show that a profit-maximizing monopolist that faces no entry threat will never operate on the inelastic
portion of the market demand curve. Show that if a monopolist can sell its product in two distinct
markets, then a higher price can be charged in the market that has the lower price elasticity.
2. Suppose that the government declares a monopolist, with declining long-run average costs and marginal
costs to be a public utility and decrees that it must serve all who are willing to buy at an established price.
The price provides the monopolist with a “fair return,” that is, a normal rate of return on capital. Show
this output and price diagrammatically. Why is the output level not economically efficient?
3. What is the role played by the competitive fringe in the dominant firm model of oligopoly? Why does an
increase in the size of the fringe result in a reduction in the dominant firm’s profit-maximizing price?
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