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Unformatted text preview: Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 1 1 Monopoly 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen November 7, 2007 Lecture 22 Monopoly Outline 1. Chap 10: Monopoly 2. Chap 10: Shift in Demand and Effect of Tax 1 Monopoly The monopolist is the single supply-side of the market and has complete control over the amount offered for sale; the monopolist controls price but must operate along consumer demand. 1.1 Revenue in Monopoly Review the revenue in perfect competition: R = P Q (1.1) AR = MR = P. (1.2) Revenue of monopolist is also R = P ( Q ) Q, but P changes with Q because the monopolist faces the whole market demand and his quantity supplied affects the market price. Then the average revenue is R AR = = P ( Q ); Q and the marginal revenue is dR d ( P Q ) dP MR = = = P ( Q ) + Q . dQ dQ dQ The relation between P and Q is determined by the demand curve (see Figure 1). Since dP &lt; , dQ MR &lt; P ( Q ) . 15 10 Demand Curve P 1 5 P 2 Q Q 0 1 5 2 10 15 1.2 Output Decision in Monopoly 2 Example (A Demand Function) . Suppose the price is P = 10 Q D , where Q D is the quantity demanded. Calculate the average revenue and the marginal revenue: AR = P = 10...
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