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Wk7_Section_07

# Wk7_Section_07 - Week 7 Section Notes EWMBA201A Rob Seamans...

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September 23, 2007 Week 7 Section Notes 1 Week 7 Section Notes EWMBA201A Rob Seamans

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September 23, 2007 Week 7 Section Notes 2 Administrative Stuff 1. Read and prepare the aluminum case for next class. 2. Pricing project: look at class website for examples.
September 23, 2007 Week 7 Section Notes 3 Today’s Agenda 1. Review of pricing for monopolist and price-taking firm 2. Review of price discrimination 3. Problem set 4 (selected questions) 4. Thought questions (if time, otherwise look over at home)

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September 23, 2007 Week 7 Section Notes 4 Overview of Pricing Knowledge of costs completes the path to understanding of how firms should price. To maximize profits, set MR = MC (by adjusting Q). To solve, you need to know about Revenues and Costs.
September 23, 2007 Week 7 Section Notes 5 Overview of Pricing: Marginal Revenue In competitive markets, firms are price-takers, so firm cannot affect price by changing quantity (we just have P). Monopolist can affect the market price. Changing Q will change P, so we write P(Q). TR = P(Q)*Q MR = dTR/dQ = P(Q) + Q*dP(Q)/dQ For firm in competitive market, MR=P.

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September 23, 2007 Week 7 Section Notes 6 Overview of Pricing: Marginal Cost TC = C(Q) MC = dC(Q)/dQ In competitive markets, MC curve is the supply curve. Set P=MC, so long as P>minATC. For monopoly, set MR=MC, so long as P>minATC. See following graphs…
September 23, 2007 Week 7 Section Notes 7 Supply Curve for a Price Taking Firm Price, Cost ATC q 0 S q’ p 0 p’ MC Quantity

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September 23, 2007 Week 7 Section Notes 8 Monopolist with Linear Demand Curve Q Q * P * MR D MC P, C
September 23, 2007 Week 7 Section Notes 9 Monopolist with Linear Demand Curve and P>minATC Q Q * P * MR D MC P, C ATC

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September 23, 2007 Week 7 Section Notes 10 Monopolist with Linear Demand Curve and P>minATC Q Q * P * MR D MC P, C ATC Costs Profits Entire rectangle is revenue C(Q*) Notice that Total Costs are Less than Total Revenues
September 23, 2007 Week 7 Section Notes 11 Monopolist with Linear Demand Curve and P<minATC Q Q * P * MR D MC P, C ATC C(Q*) Notice that Total Costs are Greater than Total Revenues

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September 23, 2007 Week 7 Section Notes 12 Price Discrimination: Overview Price discrimination allows the firm to achieve higher profits. 1 st degree PD achieves the highest profits (charge every consumer her maximum willingness to pay).
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Wk7_Section_07 - Week 7 Section Notes EWMBA201A Rob Seamans...

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