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502 NCC Lecture 13 Does the fact that perfect competition is socially efficient and monopoly is not mean that we should outlaw monopoly? Suppose the monopoly in question is the result of a patent that prevents all but one firm from manufacturing a highly valued product. Would we be better off without patents? Alternatively, suppose the monopolist is a natural monopolist. Price ($/minute) AC MC Minutes (millions/day) Efficiency requires P=MC But if MC<AC, setting P=MC means losing money Price ($/minute) 0.08 P = 0.05 20 Economic loss = -$600,000/day AC MC D Minutes MR (millions/day) It is better for a natural monopolist to maximize profit and stay in business than to charge MC and go out of business. Price ($/minute) 0.15 Consumer surplus = $500,000/day Economic profit = $400,000/day AC MC D 20 MR Minutes (millions/day) 0.10 0.08 0.05 The efficiency loss from single-price natural monopoly stems from the fact that the profit-maximizing price is above marginal cost, thereby excluding many buyers who "should" be in the market (because they are willing to pay a price greater than or equal to marginal cost). Price ($/minute) Output shortfall 0.10 AC MC D 20 MR 40 Minutes (millions/day) 0.05 But what if the monopolist could devise some means of lowering prices to some buyers while keeping price high for others? Price discrimination: charging different buyers different prices for the same good or service. Example 18.1. Ram is a monopolist in the market for carved sisalwood bowls in his village, a minor tourist stop in Northern India. Each day 8 tourists visit his shop, and each has a different reservation price for Ram's standard bowl. If these reservation prices are as listed in the table, draw the demand curve Ram faces each day. Visitor A B C D E F G H Reservation price $16 $14 $12 $10 $8 $6 $4 $2 $/bowl 16 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 D 8 Quantity Example 18.2. If Ram has to charge the same price to all buyers, and he can produce as many bowls as he chooses at a cost of $3 each (and bowls can be sold only in integer amounts), how many bowls should he sell each day if his goal is to maximize profit? $/bowl TR=28 16 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 D 8 Quantity TR=36 TR=40 TR=40 Expand if MR > MC = 3. MR from 3rd bowl = 8; MR from 4th bowl = 4; MR from 5th bowl = 0; So keep expanding until Q = 4. Example 18.3. In the preceding example, how much profit does Ram make? Total revenue = 10x4 = $40/day Total cost = 3x4 = $12/day Profit = $40 - $12 = $28/day Example 18.4. In the preceding example, is 4 bowls per day a socially efficient level of output? Visitor A* B* C* D* E* F* G* H Reservation price $16 $14 $12 $10 $8 $6 $4 $2 Visitors A-G are willing to pay more for a bowl than the cost of producing one, and thus it is efficient that they each should have one. Visitor H is not willing to pay the cost of producing a bowl and so should not have one. Thus the socially efficient number is 7 bowls/day. Example 18.5. Now suppose that Ram is a shrewd judge of human nature. After a moment's conversation with a visitor, he is able to discover the visitor's reservation price for a bowl. If Ram then charges each visitor his respective reservation price, how many bowls will he sell and how much profit will he make? Ram will sell bowls to visitors A-G and each will pay his reservation price. He will not sell to visitor H. Visitor A* B* C* D* Reservation price $16 $14 $12 $10 Visitor E* F* G* H Reservation price $8 $6 $4 $2 Total revenue = 16+14+12+10+8+6+4 = $70/day Profit = 70-21 = $49/day Total cost = 7x3 = $21/day A monopolist who is able to charge each buyer his or her reservation price is called a perfectly discriminating monopolist. For a perfectly discriminating monopolist, there is no efficiency loss. All buyers are served who are willing to pay a price high enough to cover marginal cost. In practice, however, there are virtually no sellers who know each buyer's reservation price. Price discrimination does occur, but it is imperfect price discrimination. The Hurdle Method of Discrimination Example 18.6. Ram's 8 visitors again have the following reservation prices for carved wooden bowls. Visitor A B C D Reservation price $16 $14 $12 $10 Visitor E F G H Reservation price $8 $6 $4 $2 Ram does not know each buyer's reservation price, but he knows that all buyers with a reservation price above $9/bowl never use discount coupons, whereas those with reservation prices below $9 use them whenever they available. are If Ram makes coupons available in the government tourist magazine, those buyers who clip and present them get to pay a discount price for bowls. Others pay the regular list price for bowls. To maximize profit, at what levels should Ram set the list price of a bowl? The discount price? In each submarket, the monopolist should expand output as long as MR>MC. Visitor A B C D Reservation price $16 $14 $12 $10 List-Price Submarket Reservation price $16 $12 $4 B C D $14 $8 0 $12 $4 -$4 $10 H $2 G $4 F $6 Visitor E F G H Reservation price $8 $6 $4 $2 Visitor A MR $16 Discount-Price Submarket Visitor Reservation price E $8 MR $8 For the list price submarket, MR from sale of fourth bowl is 4 > MC =3. To sell 4 bowls in the list price submarket, Ram will choose a list price of $10. At that price, all non-coupon clippers buy a bowl. For the discount price submarket, the MR from the sale of the 2nd bowl is 4; the MR from the 3rd bowl is 0. So Ram should choose a discount price of $6/bowl and sell 2 bowls in the discount market. $/bowl 16 14 12 10 8 6 4 2 0 1 TR=28 TR=36 TR=40 TR=8 TR=12 TR=12 TR=8 D 2 3 4 List price buyers 5 6 7 8 Discount price buyers Quantity Example 18.7. At a list price of $10/bowl and a discount price of $6/bowl in the preceding example, how many bowls does Ram sell and how much profit does he make? Is this outcome socially efficient? List price Visitor A B C D Reservation price $16 $14 $12 $10 Visitor E F G H Discount Reservation price $8 $6 $4 $2 Total revenue = 10x4 + 6x2 = $52/day Total cost = 6x3 = $18/day Profit = 52-18 = $34/day The outcome is not socially efficient because visitor G is excluded even though he is willing to pay more than marginal cost. But it is more efficient than the single-price case. Price Price Qs* = profit-maximizing quantity for single-price monopolist Ps* MC D Qs* Q MR MC QL* = profit maximizing quantity at list price QD* = profit maximizing quantity at discount price MC D PL* PD * QL* Q MR QL*+QD* Examples of the hurdle method of price discrimination: Rebate coupons: hurdle = having to mail the coupon in Temporary sales: hurdle = having to find out when & where the sale occurs Hardback books and paperbacks: hurdle = having to wait for the paperback Evening shows and matinees: hurdle = having to go at a less desirable time Cadillacs and Chevrolets: hurdle = having to drive a lower quality car Coach fares and Super-Saver fares: hurdle = having to stay over a Saturday night Scratch 'n Dent sales: hurdle = having to buy a blemished appliance In general, the more finely the monopolist can partition his market using hurdle methods, the smaller the efficiency loss will be. It is common in most firms to see not one but a whole menu of different discount prices, each with a different set of restrictions (the deeper the discount, the more stringent the restriction). Given the wide latitude many firms have to expand their markets through the use of the hurdle model of differential pricing, the efficiency problem of natural monopoly will often be of only secondary importance. The fairness problem: The monopolist may earn an economic profit. Price ($/minute) Economic profit = $400,000/day 0.10 0.08 0.05 D 20 MR Minutes (millions/day) AC MC Aside: Although the monopolist charges more than marginal cost, she may not make an economic profit because she needs extra revenue to cover fixed costs. Price ($/minute) 0.12 0.10 AC MC D 20 MR Minutes (millions/day) Economic loss = $400,000/day 0.05 . But the monopolist may earn economic profits. If she does, their source is the list price buyer, who could have bought at a discount had he been willing to jump a minor hurdle. How is each dollar of the monopolist's excess profits distributed? Federal corporate income tax Dividend or capital gains to shareholders Shareholders' Federal tax Shareholders' State income tax 35 cents 64 cents 11 cents 4 cents Sales taxes Total taxes = 53 cents on each dollar. 3 cents The hurdle method of pricing mitigates efficiency losses associated with natural monopoly. On the fairness side, the source of excess profits is the list-price buyer. These profits are distributed to shareholders, many of whom are not wealthy. And 53% of each dollar of excess profits goes to finance various government services, many of which are targeted at low-income families. So the fairness argument against natural monopoly may be less compelling that it might first appear.
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Description: Physics 112 - Exam #1 Solutions 1. 2. (a) C (b) B Fall 2005 Point #1: F buoy fd Point #2: F buoy Point #3: F buoy fd (1 point for each correctly identified force, direction, and magnitude) w w w 3. 6. A E 4. C (1 point for B or D) G 5...
PrelimIAnswer
Path: Cornell >> PHYS >> 1112 Spring, 2007
Description: Solutions Prelim I Spring 2007 1. speeding up, slowing down, slowing down, speeding up 2. (A) 3. (B) 4. (B) 5. (C) 6. (E) 7. (C) 8. (A) 9.(a) down, up, zero 9.(b) down, up, up 1. (a) vA = vA^ = v0x^ is also the initial velocity of the bale. The time ...
_jan29_ppt_
Path: Cornell >> PHYS >> 1112 Spring, 2007
Description: Monday Jan 29, 2007 Vectors Subtraction Components Products 3D kinematics Sample problem Read: (Today) 3.1-3.3 (Wednesday) 3.5 Homework 2: Due Friday Recitations: Bring Tutorial Book Labs: Start Feb 5 Are you registered for lab? ...