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Intraindustry_Trade__Lesson_29_ - Review of Monopoly...

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1 Lesson 29 1 Review of Monopoly Pricing The previous lesson sketched out a model of monopolistic competition and the implications for trade In this lesson, we review the profit maximizing strategy of a monopolist In the next lesson, we show how this strategy changes when there is an oligopoly Lesson 29 2 All firms maximize profit by producing at a point where marginal revenue equals marginal cost With perfect competition, firms are price takers and so marginal revenue equals price e.g., a peanut farmer can sell peanuts for $1 per bushel, regardless of the number of bushels sold Lesson 29 3 But a monopolist faces a downward- sloping demand curve The only way to sell more is to cut price e.g., suppose a pharmaceutical company invents a vaccine to prevent common colds Further suppose that it can sell one thousand doses per year at $50 per dose
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2 Lesson 29 4 Suppose that cutting the price to $49.99 increases sales by 1 dose per year This increases revenue by the additional sale…
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Intraindustry_Trade__Lesson_29_ - Review of Monopoly...

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