Principles of Economics- Mankiw (5th) 343

Principles of Economics- Mankiw (5th) 343 - CHAPTER 16 O L...

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CHAPTER 16 OLIGOPOLY 353 COMPETITION, MONOPOLIES, AND CARTELS Before considering the price and quantity of water that would result from the duopoly of Jack and Jill, let’s discuss briefly the two market structures we already understand: competition and monopoly. Consider first what would happen if the market for water were perfectly competitive. In a competitive market, the production decisions of each firm drive price equal to marginal cost. In the market for water, marginal cost is zero. Thus, under competition, the equilibrium price of water would be zero, and the equi- librium quantity would be 120 gallons. The price of water would reflect the cost of producing it, and the efficient quantity of water would be produced and consumed. Now consider how a monopoly would behave. Table 16-1 shows that total profit is maximized at a quantity of 60 gallons and a price of $60 a gallon. A profit- maximizing monopolist, therefore, would produce this quantity and charge this price. As is standard for monopolies, price would exceed marginal cost. The result
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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