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2. Does a monopoly cause inefficiency? Provide a detailed discussion. 5. What is a monopsony? Provide...

2. Does a monopoly cause inefficiency? Provide a detailed discussion.

5. What is a monopsony? Provide examples to justify your answer.

6. What is meant by price discrimination? Why does the monopoly firm engage in price discrimination?

8. What is the logic behind price discrimination?

10. Discuss what is meant by perfect price discrimination.

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Answer #1

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A monopoly is the single seller in a market, facing a downward sloping demand curve. It maximizes profit by equating MR and MC. Since MR curve lies below demand curve P > MR, so P > MC. Since efficiency is achieved when P = MCC, a monopolist having a price higher than MC is ineffiient and generates deadweight loss (DWL) equal to:

DWL = (1/2) x (Monopoly price - Competitive price) x (Competitive output - Monopoly output)

NOTE: As per Chegg Answering Policy, 1st question is answered.

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