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# monomanual - Monopoly Manual Purpose of the Module You will...

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Monopoly Manual Purpose of the Module You will have to use information about the demand for the product and the firm’s costs to maximize long run profits for the firm by choosing the best level of production. Figure out how the firm’s costs change as its level of production changes, how its revenues change as its production changes, and how profits are affected by cost and revenue changes. There are not natural monopolies with no government control or regulation, but the principles governing successful profit maximization that apply in other kinds of markets apply in this one. You need to use marginal analysis. “Should I produce the next unit?” and “Should I have produced the previous unit?” As long as you keep getting an affirmative answers to these questions, you should continue to raise production. The first part will allow you to figure out how the unregulated monopoly firm would act -- how much it would produce and what it would price it would charge. then you can see how two different forms of government regulation could affect the firm’s output and price. You will need to compare the results of regulation with the firm’s unregulated choices and consider who gains and who loses from regulation. The Model Price (P) At a given moment in time the market price = \$ that will be paid in the market for one unit of the product. Every unit sold will be sold at this price. Marginal Revenue In a monopoly the firm must lower the price to sell additional units of the product. As a result, when the firm sells another unit it gets less than the last unit sold. As a result the marginal revenue from selling another unit is less than the price of the product. Note that when very small quantities are being sold the loss from selling previous units is small (since there are few units). In this module entry of quantities smaller than 12 (thousand) gives results in which price looks as if it is equal to marginal revenue, because the difference between the two is less than the rounding error (both are reported to four decimal places). Average Total Cost (ATC) ATC=TC/Q. Since this module assumes that the monopoly firm is acting in the long run, all costs are variable and there is are no fixed costs, so there is no distinction between ATC and average variable cost (AVC). Thus, we will refer the ATC as AC.

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Entry Cost This is the cost to the firm of being in the market. Its presence represents a barrier to entry by new firms, which would start up at a low output level and, given the entry cost, have a higher ATC than the larger, existing, firm. This entry cost, even in the long run, plays a role similar to fixed cost. Examples of entry costs are initial advertising, construction of a transmission network to carry electricity, and a licensing fee to get the right to operate. Its presence is part of the explanation of the downward slope of the ATC curve, and for the firm having a monopoly. Entry cost is the cost that the monopoly must incur in order to serve the market in which
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monomanual - Monopoly Manual Purpose of the Module You will...

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