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Class Notes - 12-3-07

Class Notes - 12-3-07 - Microeconomics Class Notes Because...

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Microeconomics – Class Notes – 12/3/07 Because monopolistic competition involves product differentiation, these firms can exert market power III. A. Graphing 1. Profit maximization – MR = MC a. This determines the quantity at profit max. 2. Price is set on the demand curve such that Price > M.C 3. Profit or Loss a. If the firm is making positive profits, the price > ATC b. Profit = (Q) * (Price – ATC) c. Profit < 0 i. Price < ATC B. Efficiency 1. Productive (Price at the min. ATC) – For monopolistic competitive markets – firms are not productively efficient because ATC > min. ATC 2. Allocative (If M.B = M.C) – The monopolistically competitive market is not allocatively efficient because at the quantity that maximizes profits, the M.B > M.C a. Monopolistic competitive firm under produces the good b. The only way to make monopolistic competitive markets more efficient is to reduce variety 3. DWL a. Lost Surplus 4. Gains from variety may outweigh the DWL incurred from monopolistically
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