(a). What will happen to the bakery if a large retailer like Coles establishes a new store in a location close by and decides to price bread below cost as an opening special to attract customers? What will happen to the bakery if the new retailer continues this pricing behaviour for, say, one year?

(b). How should a monopoly choose its quantity of production to maximise profits? Explain why producing either less or more than the level of output at which marginal revenue equals marginal cost will reduce profits. Since a monopolist does not fear competition, what prevents it from raising its price as high as it wishes to make higher profits?