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lec08 - o MC 21 P> MC Less output than socially optimal $...

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1 1 Monopoly One firm No entry 3 Monopolist: sets price. faces demand curve. $ Q D p 1 Q 1 4 Monopolist must lower price to sell extra units. $ Q D p 1 p 2 Q 1 Q 2 5 Marginal Revenue = extra revenue obtained from selling one extra unit of output. $ Q D p 1 MR 1 Q 1 MR 6 $ Q D p 1 MR 1 Q 1 MR For a monopolist: MR < P. 8 AC MC $ Q Firm has MC and AC curves.
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2 9 Combine costs and revenues: $ Q D MR MC AC 10 $ Q D P* Q* MR MC AC AC* Firm chooses output at which MR = MC. What is firm’s output and price? 12 What is profit of firm? $ Q D P* Q* MR MC AC profit Profit > 0 P > AC 18 Outcome with monopolist: P > MC Profit > 0 P > AC P > min AC AC > min AC Waste is possible. New technologies might not be adopted. 20 P > MC Less output than socially optimal. $ Q D = MWTP P* P o Q* MR Q
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Unformatted text preview: o MC 21 P > MC Less output than socially optimal. $ Q D = MWTP P* P o Q* MR Q o Deadweight loss MC 3 22 Natural Monopoly: Cost of meeting demand is lower with one firm than with more than one firm. 24 $ Q AC D IRTS: A given % increase in all inputs raises output by more than that %. 25 $ Q AC D IRTS Average costs fall. AC = TC Q 27 Policy Conclusions When there is a natural monopoly: allow monopoly but regulate it to prevent it from monopolistic pricing. When there is not a natural monopoly: prevent the growth of monopolies and the exercise of monopoly power....
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