Wk8_Section_07 - Week 8 Section Notes & Review for Final...

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September 29, 2007 Week 8 Section Notes 1 Week 8 Section Notes EWMBA201A Rob Seamans
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September 29, 2007 Week 8 Section Notes 2 Administrative Stuff 1. Final Exam for both sections: Friday October 5 th 6pm. 2. Practice questions available on course website. 3. Pricing project due next Monday or Tuesday; one member of your team should email Prof. Wolfram a copy before class.
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September 29, 2007 Week 8 Section Notes 3 Today’s Agenda 1. Overview of major course topics - Focus on entry, exit and equilibrium 1. Problem set #5 (selection) 2. Practice problems (selection)
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September 29, 2007 Week 8 Section Notes 4 Overview of Topics Model of perfectly competitive market Demand elasticity Decision trees and real options Costs and cost functions Pricing in a perfectly competitive market Monopoly pricing Price discrimination Entry, exit and long-run equilibrium
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September 29, 2007 Week 8 Section Notes 5 Quick Review of Costs Different types of costs: TC = FC + VC FC = Costs that do not vary with quantity VC = Costs that do vary with quantity MC = cost of one additional unit of production = dTC/dQ AC = TC/Q Opportunity cost = value of next best opportunity What else could you be doing with your resources? Sunk costs = costs already expended or non-recoverable Is the cost behind you on the decision tree?
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September 29, 2007 Week 8 Section Notes 6 Quick Review of Pricing Perfectly competitive firm sets P=MC to maximize profits Since firms are price takers and can sell as many units as they choose at price P, MR = P for any firm. In short-run equilibrium (without entry) firms can be profitable, if AC<MC. If AC=MC then economic profit = 0. If AC>MC then a firm should shut down. Monopolist sets MR=MC to maximize profits Find MR by taking derivative of R=P(Q)*Q, or if you have a demand curve of the type P=a-b*Q, remember that MR=a-2b*Q. Revenues are not maximized at the same production point as profits, unless MC=0 (revenues are maximized where MR=0). Monopolist therefore produce at an elastic point on the demand curve, unless MC=0, in which case elasticity = -1.
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September 29, 2007 Week 8 Section Notes 7 Quick Review of Price Discrimination Price discrimination allows monopolist to charge different rates to different consumers. Only meaningful for a monopoly (Why?) If some kind of PD is profitable, it helps the monopolist vs. single price benchmark. Ambiguous effect on consumers (some customers previously “shut out” of the market may get to consume). 1
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This note was uploaded on 09/15/2009 for the course EWMBA 201A taught by Professor Wolfram during the Fall '07 term at University of California, Berkeley.

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Wk8_Section_07 - Week 8 Section Notes & Review for Final...

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