PAM_2000_Spring_2009_Lecture_20

PAM_2000_Spring_2009_Lecture_20 - Lecture20 Click to edit...

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Click to edit Master subtitle style Lecture 20
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PAM 2000: Lecture 20 n Thursday: Jess Sharp, Domestic Policy Council n Agenda q Monopolist output decision q Shutdown decision q Lerner Index q Welfare effects of monopoly q Dominant firm with a competitive fringe q Price discrimination
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Introducing a New Accelerated Masters  Program in PAM n Get a Masters Degree (MS) in PAM with one additional year at Cornell q Admissions starting now for rising seniors in PAM and other social sciences n Information Session April 15, 4-5pm, MVR 114 n Questions? Contact Geysa Smiljanic at gms3@cornell.edu
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MR for Monopolist (con’t) Recall that MR for monopolist is equal to: + = + Q p p Q p p Q Q p p p * / 1 1 /
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MR for Monopolist (con’t) n So MR = p[1 + 1/ε], (ε < 0) n What if ε & infinity (i.e. very very elastic, many substitutes)?
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MR for Monopolist (con’t) n So, ignoring costs , revenue is maximized where MR = 0 n Assume that the monopolist chooses quantity and then reads the price off the demand curve it faces
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Choice of output 2 step process: 1. Firm picks the Q that maximizes profit (read P off demand curve) 2. Firm decides whether to produce Q or to shut down n The profit-maximizing Q is smaller than the revenue-maximizing Q
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Maximizing Profit for Monopolist
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Shutdown Decision n A monopoly shuts down in the long-run when the monopoly price is lower than AC n AC has to be high relative to price at monopoly-optimal point
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Market Power n Can measure market power by how much price deviates from MC (the competitive price) n Recall that competitive market result is P = MB = MC in equilibrium n Market power depends on the shape of the demand curve at the profit-maximizing Q
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n Recall MR = p[1 + 1/ε], ε < 0 n At the profit maximizing Q (and only there): q MR = p[1 + 1/ε] = MC or:
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PAM_2000_Spring_2009_Lecture_20 - Lecture20 Click to edit...

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