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Suppose Barefeet is a monopolist that produces and sells Ooh boots, an amazingly trendy brand with no close substitutes. The following graph shows the market demand and marginal revenue (MR) curves Barefeet faces, as well as its marginal cost (MC), which is constant at $20 per pair of Ooh boots. For simplicity, assume that fixed costs are equal to zero; this, combined with the fact that Barefeet's marginal cost is constant, means that its marginal cost curve is also equal to the average total cost (ATC) curve.

First, suppose that Barefeet cannot price discriminate. That is, it must charge each consumer the same price for Ooh boots regardless of the consumer's willingness and ability to pay.

On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity. Next, use the purple points (diamond symbol) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the black points (plus symbol) to shade the deadweight loss in this market without price discrimination. (Note: If you decide that consumer surplus, profit, or deadweight loss equals zero, indicate this by leaving that element in its original position on the palette.)

100 90 Monopoly Outcome 80 A 70 60 Consumer Surplus 50 O PRICE (Dollars per pair of Ooh boots) 40 Profit 30 MO = ATC 20 Deadweight Loss 10 MR Demand 0 20 40 60 80 100 120 140 160 180 200 QUANTITY (Pairs of Ooh boots) Now, suppose that Barefeet can practice perfect price discrimination-that is, it knows each consumer's willingness to pay for each pair of Ooh boots and is able to charge each consumer that amount.100 90 Monopoly Outcome 80 70 60 Profit PRICE (Dollars per pair of Ooh boots) 50 4 40 Consumer Surplus 30 MC = ATC 20 Deadweight Loss 10 Demand 20 40 60 80 100 120 140 160 180 200 QUANTITY (Pairs of Ooh boots)Consider the welfare effects when the industry operates under a monopoly and cannot price discriminate versus when it can price discriminate. Complete the following table by indicating under which market conditions each of the statements is true. (Note: If the statement isn't true for either Single-price monopolies or perfect price discrimination, leave the entire row unchecked.) Check all that apply. Statement Single-price Monopoly Perfect Price Discrimination There is no deadweight loss associated with the profit-maximizing output. O O Barefeet produces the efficient quantity of Ooh boots. 0 Total surplus is not maximized. 0 O100 90 80 Monopoly Outcome 70 60 PRICE (Dollars per subscription) 50 40 30 20 ATO MC 10 MR D 0 2 4 6 8 10 12 14 16 18 20 QUANTITY (Number of subscriptions)Which of the following statements are true about this natural monopoly? Check all that apply. It is more efficient on the cost side for one producer to exist in this market rather than a large number of producers. The cable company is experiencing economies of scale. The cable company is experiencing diseconomies of scale. O The cable company must own a scarce resource. True or False: Without government regulation, natural monopolies can earn positive profit in the short run. O True O False100 90 80 70 60 PRICE (Dollars per subscription) 50 40 30 20 ATO 10 MC MR D 2 4 6 8 10 12 14 16 18 20 QUANTITY (Thousands of subscriptions)Short Run Quantity Price Pricing Mechanism (Subscriptions) (Dollars per subscription) Profit Long-Run Decision Profit Maximization Marginal-Cost Pricing Average-Cost Pricing Suppose that the government forces the monopolist to set the price equal to marginal cost. Complete the second row of the previous table. Suppose that the government forces the monopolist to set the price equal to average total cost. Complete the third row of the previous table. True or False: Over time, the telephone company has a very strong incentive to lower costs when subject to average-cost pricing regulations. O True O False