Question 2 (10 points): Discuss the following statement published in The New York Times (April 29th 2002) using graphical analysis. You must explain you graph. "Proving that Microsoft's monopoly power harms consumers has always been a difficulty in the government's case against the company." Graph: 5 points- must label curves and axis Discussion: 5 points- must explain the graph and discuss the statement The goal of the graph is to show the assumed cost advantage of a dominant firm (represented as a monopoly) compared to small operations which would describe a competitive market. Microsoft has lower costs than competitive firms and therefore could sustain itself against competitive entry by setting monopoly price. The graph should illustrate the economic welfare (or efficiency) of the two alternatives, the magnitude of monopoly power and discuss how consumer welfare is affected (so consumer surplus must be discussed and illustrated). The graph was discussed and done in lecture class. Conclusions: Microsoft can produce deadweight loss and still outperform competition in the sense of economic efficiency, because the efficiency losses, measured by DWL, is smaller the improvements, measured by efficiency gains, of producing an output at least as great as would be produced under competition, at a lower production cost. The welfare losses that result from monopoly pricing have to be compared to the welfare gains from using the superior technology available only to Microsoft. If the efficiency gains are quite large, then the price is actually lower than the price that would prevail under perfect competition. And if this is the case, then consumer surplus is higher. Yet, just because Microsoft has a lower cost is not enough to assure that consumers would be better off! Moreover, high quality of service and constant innovation are also products that improve the welfare of consumers and which Microsoft also provides