Chapter 56: Government Intervention

1. What are the 2 types of government intervention to control monopoly power?

Price control and profit control.

2. By working at profit maximisation, what has a monopolist done?

They have decreased consumer surplus and increased producer surplus, therefore disregarding their consumer welfare.

3. Why is the maximum price limit the government set at P=MC?

This is because this is where firms are allocatively efficient, meaning that resources are going to be allocated efficiently for everyone in society.

4. Why is the AR curve straight before it hits MC in a price limit diagram?

This is because AR = P + Q, the price will stay the same no matter the output due to the max. price limit. But once it reaches outside the MR, it passes the point of allocative efficiency and both AR and MR lower.

5. What are some of the problems with regulation profit?

- Regulators may not have enough understanding of costs and rates, leading to monopolists having more knowledge and manipulating regulators into thinking their future costs would be high and therefore they would need to earn more profit.

- Monopolists have little incentive to lower costs as long as they can keep producing and earning profit from consumers whose money would be spent on costs.

- Monopolists employ too much capital as that will increase their rate of return which would lead…