PAM 200 Chapter 11 - PAM 200 Chapter 11 Monopoly and monopsony If firm produces quantity at which MR>MC the firm cannot be maximizing its profit

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PAM 200 Chapter 11 Monopoly and monopsony If firm produces quantity at which MR>MC the firm cannot be maximizing its profit because it could increase its output and its profit would go up If firm produces quantity at which MR<MC the firm cannot be maximizing its profit, because it could decrease it output and its profit would go up Thus the only situation at which the monopolist cannot improve its profit by increasing or decreasing output is where marginal revenue equals marginal cost that is if Q* denotes the profit-maximizing output then MR(Q*)=MC(Q*) Profit-maximization condition for a monopolist- condition that says that monopolist maximizes profit by producing a quantity at which marginal revenue equals marginal cost For price taking firm marginal revenue equals market price For a monopolist this is not true MR = P + Q( P/ Q) Indicates that marginal revenue consists of two parts P corresponds to increase in revenue due to higher volume-the marginal units Q( P/ Q) corresponds to decrease in revenue due to the reduced price of the inframarginal units Marginal revenue is less than the price the monopolist can charge to sell that quantity for any quantity greater than 0 Marginal revenue can either be positive or negative o Negative if increased revenue firm gets from selling additional volume is more than offset by the decrease in revenue caused by the reduction in price on units that it could have sold at a higher price
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This note was uploaded on 12/18/2008 for the course PAM 200 taught by Professor Unur during the Spring '08 term at Cornell University (Engineering School).

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PAM 200 Chapter 11 - PAM 200 Chapter 11 Monopoly and monopsony If firm produces quantity at which MR>MC the firm cannot be maximizing its profit

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