101-18_07 - NCC 502 Lecture 13 Does the fact that perfect...

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NCC 502 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 AC MC Economic loss = -$600,000/day MR 20 Minutes (millions/day) D 0.05 P= It is better for a natural monopolist to maximize profit and stay in business than to charge MC and go out of business. Price ($/minute) 0.08 AC MC Economic profit = $400,000/day 0.10 MR 20 Minutes (millions/day) D 0.05 0.15 Consumer surplus = $500,000/day The efficiency loss from single-price natural monopoly stems from the fact that the profit-maximizing price is above marginal cost, thereby excluding many buyers who "should" be in the market (because they are willing to pay a price greater than or equal to marginal cost).
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Price ($/minute) AC MC 0.10 MR 20 Minutes (millions/day) D 0.05 40 Output shortfall 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 Reservation price A $16 B $14 C $12 D $10 E $8 F $6 G $4 H $2 $/bowl Quantity 16 D 14 12 10 8 6 4 2 1 2 3 4 5 6 7 8 0
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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?
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