econ111_lecture14

# econ111_lecture14 - Econ 111 Microeconomics Spring 2009...

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1 Econ 111 Microeconomics Spring 2009 Lecture 14 Chapter 10: Market Power: Monopoly and Monopsony (2) Heiwai Tang

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2 Agenda Why E d <-1 for profit-maximizing monopolist Two-plant monopoly (numerical) Measuring monopoly power What determines monopoly power? Social cost of monopoly Price floor can be welfare-improving
3 A quick remark on why E d <-1 Recall that P = MC/(1+1/E d ) Thus, if E d > -1, say -0.5, P = -MC < 0 So we restrict ourselves to focus on E d <-1 Intuitively, it makes a lot of sense because if E d > -1, the monopoly can increase price by 1%, with quantity demanded drops by less than 1% Thus, revenue can be increased further as along as E d > -1

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4 Profit-maximizing monopolist will never produce on the inelastic portion of the demand curve Q 1 2 3 4 5 6 7 0 1 2 3 \$ per unit of output 4 5 6 7 Demand Curve Marginal Revenue E d <-1 E d =-1 E d >-1
5 Two-plant Monopoly Problem A firm has two factories for which costs are given by: C 1 (Q 1 ) = 10Q 1 2 C 2 (Q 2 ) = 20Q 2 2 The firm faces the following demand curve: P = 700 - 5Q where Q is total output -- Q = Q 1 + Q 2 .

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6 Two-plant Monopoly Problem (cont’) Find the profit-maximizing Q 1 , Q 2 and Q max R(Q 1 + Q 2 ) - C 1 (Q 1 ) -C 2 (Q 2 ) Rule of thumb: MC(Q 1 ) = MC(Q 2 ) = MR(Q) MC(Q 1 ) = 20Q 1 MC(Q 2 ) = 40Q 2 R(Q) = P(Q)Q = (700 - 5Q)Q = 700Q - 5Q 2 MR(Q) = 700 – 10Q = 700 – 10(Q 1 + Q 2 )
7 Two-plant Monopoly Problem (cont’) Solving 2 equations for 2 unknowns: Eqt(1): 700 – 10(Q 1 + Q 2 ) = 20Q 1 Eqt(2): 700 – 10(Q 1 + Q 2 ) = 40Q 2 Dividing both sides Æ 20Q 1 = 40Q 2 Æ Q 1 = 2Q 2 Plug this into Eqt(2): 700 – 10( 2Q 2 + Q 2 ) = 40Q 2 700 – 30Q 2 = 40Q 2 Æ Q * 2 = 10; Q 1 * = 20

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## This note was uploaded on 10/11/2009 for the course ACCT 101+ acct 101+ taught by Professor Various during the Fall '09 term at HKUST.

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econ111_lecture14 - Econ 111 Microeconomics Spring 2009...

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