monopoly2-ho

# monopoly2-ho - Monopoly Chapter 24(cont monoply.gif(GIF...

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Unformatted text preview: Monopoly Chapter 24 (cont.) monoply.gif (GIF Image, 289x289 pixels) http://i4.photobu Motivating Questions What price and quantity does a monopoly choose? What are the welfare effects of monopoly? What are the effects of taxes on monopolies? Is monopoly ever justified/efficient? Monopoly Behavior: price discrimination Taxation and Monopoly Consider a quantity tax, t per unit Consumers pay p = P ( y ), but monopoly only gets P ( y )- t Profit maximization problem: max y ( P ( y )- t ) y- C ( y ) = max y P ( y ) y- C ( y )- ty Optimal condition: MR ( y ) = MC ( y ) + t Example: Linear Demand Inverse demand: P ( y ) = 10- y ; cost: C ( y ) = 4 y Find MR: MR ( y ) = 10- 2 y Find MC: MC ( y ) = 4 Optimality condition: MR ( y ) = MC ( y ) + t ⇐⇒ 10- 2 y = 4 + t , So y t = 6- t 2 = 3- t 2 Find price by plugging into inverse demand: p t = 10- (3- t 2 ) = 7 + t 2 Notice: with t = 0, p m = 7, so the tax raises the price by p t- p m = t 2 , i.e. less than the full amount of the tax. Monopoly Taxation General (not just for monopoly) question: how much of a tax is passed to the consumer? Recall our analysis of tax incidence competitive firms: the price rises by less than the amount of the tax. Taxation and Competitive Firm ◮ With competitive firms, price will rise by less than tax. y Demand price MC + t p c (t) MC p c t Also, recall how elasticity influences tax incidence: the more elastic supply, the more of the tax is borne by the consumer. Monopoly Taxation General (not just for monopoly) question: how much of a tax is passed to the consumer?passed to the consumer?...
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monopoly2-ho - Monopoly Chapter 24(cont monoply.gif(GIF...

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