L18 - Economics 101:Principles of Microeconomics Professor...

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1 Economics 101:Principles of  Microeconomics Professor Jo Hertel HW now due in Thursday’s lecture! Lecture 19: Monopoly Definition The monopolist’s output and pricing decision Deadweight loss Price discrimination Natural monopoly and regulation
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2 Finishing up: Import quotas domestic demand domestic supply world price Imports b/f quota Domestic price with quota Imports after quota =q A B C D q p p w p q An import quota q decreases the available supply to q S dom +q . Hence, price increases from p W to p q . Total surplus decreases by B + D Importers gain a quota rent of (p q - p w )∙q Import = C q D domestic q S domestic A quota q is equivalent in its effects to a tariff that reduces imports to q .
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3 What is a monopoly? Monopoly is a market structure where a single seller of a product with no close substitutes serves the entire market. De Beers Diamonds, Standard Oil before break- up, Poinsettias, utility companies, gas pipelines. There are also local monopolies, like movie theaters in very small towns. Under perfect competition each firm is small relative to the size of the market. The monopolist is the market , and hence is able to ‘move along the demand curve’.
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4 What does a monopoly do? Like all producers, a monopoly maximizes its profit . It maximizes profit by setting MR = MC. In a competitive industry, all producers are price-takers: MR = p. A monopolist does not have to take prices as given: it can operate along the entire demand curve. Therefore, for a monopoly MR is not equal to p .
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5 What is the monopolist’s marginal  revenue curve? p q TR = p∙q MR 10 0 0 9 1 9 9 8 2 16 7 7 3 21 5 6 4 24 3 5 5 25 1 4 6 24 -1 3 7 21 -3 2 8 16 -5 1 9 9 -7 Suppose demand is given by q D = 10 - p p > MR always: to sell add. units, the monop. must lower price on all units sold
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6 Marginal revenue with linear demand Fact: For a linear demand curve, the marginal revenue curve is a line with the same y- intercept but twice the slope . That is: if demand is given by p = a – bq, we have MR = a – 2bq demand p = 20 – 2q: MR = 20 – 4q. note demand is inverted from its usual form here 0 2 4 5 6 8 10 0 2 4 6 8 10 q p D MR
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7 B A Monopolist’s demand and marginal  revenue 0 2 4 6 8 10 0 2 4 6 8 10 q p D MR To increase quantity from 3 to 4: the price must be lowered on all units sold – the price effect (A), which is negative.
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