1)What are the characteristics of natural monopoly? 2)Pfeitzer is a monopolist for a new drug that makes people feel thinner

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1)What are the characteristics of natural monopoly?

2)Pfeitzer is a monopolist for a new drug that makes people feel thinner. The total cost function is C(Q)=100+12Q+2Q2C(Q)=100+12Q+2Q2. The inverse demand function is p(Q)=84−2Q.p(Q)=84−2Q.

a) What are the efficiency losses of the monopoly pricing compared to competitive prices?

b) Pfeitzer argues that other firms should not be allowed to enter the market, since it is a natural monopoly. A potential competitor argues that it is not a natural monopoly. Show why both are right at the same time.

3)Market supply in a competitive industry is p = Q. Demand is p = 100 - Q. Production creates pollution with a social cost of $1 per unit of output. In response to environmentalists, the government creates a tax of $2 per unit. Is overall welfare improved or reduced by the tax?

a) Find the total welfare when the government does not intervene.

b) What is the socially optimal output level? And the total welfare at this level of output?

c) When the government imposes a tax of $2 per unit, calculate the DWL created by the excessive tax.