The diagram below shows a profit-maximising monopolist's cost and revenue curves; the firm only incurs fixed costs of production and no variable costs. Costs and Revenue 0 D MR The price set by the firm will be ATC AR Output

Imagine that you ale managing a small firm and thinking about entering the market of a monopolist. The monopolist is currently charging a high price, and you have calculated that you can make a nice profit charging 10 less than the monopolist. Before you go ahead and challenge the monopolist, what possibility should you consider for how the monopolist might react?

Is a monopolist allocatively efficient? Why or why not?

Can you think of any examples of successful predatory pricing in the real world?