econ100_winter2010_lecture14_topost

econ100_winter2010_lecture14_topost - Alternative Way to...

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Alternative Way to Think of Monopoly Pricing Recall Monopolist must set MR=MC, and ) 1 1 ( P MR
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Replace MR=MC with 1 1 ) 1 1 ( MC P or P MC
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What does this rule mean? Price is set as a function of marginal cost and the elasticity of demand Price is set farther away from MC as demand becomes less and less elastic
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Monopoly Power Pricing policies of monopolist may apply in ANY case in which a firm can set its own P, or set P > MC With a few firms in the market, or with differentiated products, firms will have monopoly power Can set price Face downward sloping D curve
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Measure of monopoly power Lerner Index: L = (P-MC)/P (markup of price over marginal cost, as fraction of price) L = 1/| ε | Relevant elasticity of demand is at the FIRM level
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Lerner index for perfectly competitive firm: P-MC = 0, so index = 0 (recall elasticity of demand in this case is infinite) Among firms with some ability to set P > MC, index increases as demand becomes less elastic
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P vs MC and Elasticity of Demand (I) P Q D MR MC
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P vs MC and Elasticity of Demand (II) P Q D MR MC
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Monopolist produces Q=800, sets P=$40, MC = (1/40)Q What is elasticity of demand? MC(800) = (1/40)(800) = 20
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econ100_winter2010_lecture14_topost - Alternative Way to...

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