Consider the market for rolled cigarettes in the early-twentieth century. Suppose it is monopolized. The market demand function is: P=12-2X; where P is the price per pack, and X millions of packs per annum. The monopolist's marginal revenue function is: MR=12-4X; the monopolist's marginal cost (MC) equals its average total cost (ATC): MC=ATC=4. Suppose that under the "rule of reason doctrine," the Supreme Court orders this monopoly to be "broken up" and turned into a competitive industry. Assume the demand function will remain unchanged, but the competitive market supply function will be: P=4. (Hint: It will help if you graph the problem.)
True or False (2 points each) - State whether you think the following statements are true or false. If a statement is false, then write "False," and in the space provided explain why it is false. For a true statement, simply write "True".
1. The profit-maximizing monopolist will produce 2 units of output, ceteris paribus.
2. The market output for the competitive industry will be 1 unit of output, ceteris paribus.
3. The producer surplus will be greater for the monopolist than in it will be for the competitive industry, ceteris paribus.
4. The consumer surplus generated by the monopolist will be greater than the consumer surplus generated by the competitive industry, ceteris paribus.
5. Profit generated by the monopoly is greater than the profit generated in the competitive market, ceteris paribus.
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