Question

For this section, write whether the statements are True or False or Uncertain (if you say uncertain, have enough evidence to back your answer just as much as the true or false responses). Explain your answer and use diagrams where necessary.

(a) A uniform monopolist has an upward sloping MC curve. Claim: A price ceiling set below the monopoly price will increase welfare more than monopoly profits. Assume no shut down of the monopoly.

(b) A consumer with perfectly inelastic demand for paper towels will spend their money on paper towels because of a lowered price of $2 to $3 on a bulk that can last two years instead of investing that money.

Answer 1

Ans. a) Uncertain - For certain prices , the price ceiling would increase welfare because monopolist would become a price taker and output would increase. However , if price ceiling is very low , monopolist could produce even less output than unregulated monopolists and thus welfare would be lower.

b) False - This is false because a rational consumer would be more likely to invest that money so that he or she can earn interest , but buying paper Towels in bulk would not give any interest. If the interest is greater than discount on Paper towels , the consumer would prefer to invest.

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