Econ 4010 Lecture 22

Econ 4010 Lecture 22 - <Lecture 22> 10. Market Power:...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
<Lecture 22> 10. Market Power: Monopoly Market Power Ability to affect the price of a good Monopoly Market that has only one seller but many buyers To maximize profit, the monopolist must first determine its costs and the characteristics of market demand. Given this knowledge, the monopolist must then decide how much to produce and sell. Consider a firm facing the following demand curve: P = 6 – Q TR = P * Q = (6 - Q) Q, AR = TR / Q = 6 – Q, MR = dTR / dQ = 6 – 2Q Average and Marginal Revenue (p.341) Profit Maximization (p.342) 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Example: Suppose the cost of production is C = 50 + Q 2 , and demand is given by P = 40 – Q. AC = 50/Q + Q, MC = 2Q, R = P * Q = 40Q – Q 2 , MR = 40 – 2Q. By setting marginal revenue equal to marginal cost, you can verify that profit is maximized when Q = 10. A Rule of Thumb for Pricing: (P – MC)/P = - 1 / E d , or P = MC / [1 + (1 / E d )] MR = dR / dQ = d(PQ) / dQ = (dP / dQ) Q + P = (dP / dQ) (Q / P) P + P = [(1 / E d ) + 1] P = MC The Elasticity of Demnad: E d = (P / Q) (dQ / dP) (P - MC)/P is the markup over MC as a percentage of price. In a perfectly competitive market in which demand is extremely elastic, P = MC. Q1. A monopolist firm faces a demand with constant elasticity of -2.0. It has a constant marginal cost of $20 per unit and sets a price to maximize profit. If marginal cost should increase by 25 percent, would the price
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 5

Econ 4010 Lecture 22 - &lt;Lecture 22&gt; 10. Market Power:...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online