slides_15_H.pdf - On a previous episode of Microeconomics...

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MONOPOLY 1 On a previous episode of Mi croe co nomics Profit maximization implies MR = MC Assume firm is a price-taker: MR = p implies p = MC Today: consider opposite extreme: firm is a monopolist 2 Outline Marginal revenue and optimal monopoly pricing Elasticity rules Monopoly and efficiency 3 Outline Marginal revenue and optimal monopoly pricing Elasticity rules Monopoly and efficiency 4
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Monopoly One seller, many buyers No good substitutes for seller’s product Barriers to entry (e.g., patent) Price maker (not price taker) Sources of monopoly power - Patents and copyrights (Lipitor, Lion King) - Trade secret (Google search engine) - Cost or product advantage (Intel) - Network effects (Microsoft) 5 ICE CREAM PRICING (INSPIRED BY TRUE EVENTS) Ice-cream pricing Ice-cream truck: driver/operator rents truck, buys ice-cream rom factory, keeps all of the profits Fixed cost (truck rental): $15/hour Marginal cost (wholesale cost of ice-cream): $3 inverse demand (per hour): p = 10 - 0.5 q (see table on next page) What price generates the most profit? 7 Ice-cream pricing total increm. increm. price demand revenue cost revenue cost profit 10.0 0.0 0.0 15.0 -15.0 9.5 1.0 9.5 18.0 9.5 3.0 -8.5 9.0 2.0 18.0 21.0 8.5 3.0 -3.0 8.5 3.0 25.5 24.0 7.5 3.0 1.5 8.0 4.0 32.0 27.0 6.5 3.0 5.0 7.5 5.0 37.5 30.0 5.5 3.0 7.5 7.0 6.0 42.0 33.0 4.5 3.0 9.0 6.5 7.0 45.5 36.0 3.5 3.0 9.5 6.0 8.0 48.0 39.0 2.5 3.0 9.0 5.5 9.0 49.5 42.0 1.5 3.0 7.5 5.0 10.0 50.0 45.0 0.5 3.0 5.0 4.5 11.0 49.5 48.0 -0.5 3.0 1.5 8
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Optimal pricing: calculus Since there is a one-to-one correspondence between price and demand (the demand curve), we can either determine optimal price or optimal output Profit is normally an inverted-U-shaped function of output If slope is positive, then higher output leads to higher profit If slope is negative, then lower output leads to higher profit
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