10 Monopoly and Monopsony

# 10 Monopoly and Monopsony - 10 MONOPOLY AND MONOPSONY...

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MONOPOLY AND MONOPSONY 10 Econ 100A Mortimer 10/21/2009 1

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PROFIT MAXIMIZATION BY A MONOPOLIST Profit, Total Revenue and Total Cost The monopolist’s demand curve = the market demand curve e.g., P(Q)=12-Q TR(Q)=P(Q)Q=12Q-Q 2 TC(Q) = ½ Q 2 Profit = π = TR-TC = 12Q-1.5Q 2 Econ 100A Mortimer \$ Q 10/21/2009 2
PROFIT MAXIMIZATION BY A MONOPOLIST Profit, Marginal Revenue and Marginal Cost π is maximized when dπ/dQ=0 – i.e., incremental profit resulting from a small increase in Q is just zero MR = and MC = . 12-3Q = 0 MR=MC at Q = 4. Average Revenue = TR/Q = PQ/Q = P. AR = P=12-Q and MR=12-2Q. MR AR Recall AR MR for a competitive firm. Econ 100A Mortimer P Q MC of the last unit produced < P 0 MC MR dQ dTC dQ dTR = - = - 10/21/2009 3

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PROFIT MAXIMIZATION BY A MONOPOLIST Profit, Marginal Revenue and Marginal Cost π is maximized at Q = 4 TR=PQ=12Q-Q 2 = TC = ½ Q 2 = π = TR-TC = MR=12 – 2Q = MC = Q = P = 12-Q = AC = TC/Q = ½ Q = π = (P-AC)Q = Econ 100A Mortimer P Q 10/21/2009 4 AC MR MC D=AR
NO SUPPLY CURVE IN MONOPOLY The monopolist determines both P and Q. The monopolist may be willing to produce the same quantity at different prices, or different quantities at the same price. Econ 100A Mortimer 10/21/2009 5 Q P

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MARGINAL REVENUE AND PRICE ELASTICITY Econ 100A Mortimer The effects of selling additional units ΔQ on total revenue Initially, TR= Areas I+II After the sales increase, TR = Areas II+III ΔTR = Area III – Area I = P(Q)ΔQ – ΔP(Q-ΔQ) MR = ΔTR/ΔQ = P(Q) – (ΔP/ΔQ)(Q- ΔQ) As ΔQ approaches zero, P(Q- ∆Q) P(Q) P Q in millions II III I Q- ∆Q Q D dQ dP Q ) Q ( P dQ ) Q ) Q ( P ( d dQ dTR MR + = = = The additional revenue from the additional units sold (marginal units) The lost revenue from the lower price on the existing units (inframarginal units) 10/21/2009 6
MARGINAL REVENUE AND PRICE ELASTICITY 1) MR depends on E d 2) Since E d is negative MR < P = AR. Econ 100A Mortimer

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## This note was uploaded on 02/12/2010 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at Berkeley.

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10 Monopoly and Monopsony - 10 MONOPOLY AND MONOPSONY...

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