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Lecture 19 - Economics 101A(Lecture 19 Stefano DellaVigna...

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Economics 101A (Lecture 19) Stefano DellaVigna November 3, 2009
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Outline 1. Market Equilibrium in The Long-Run II 2. Pro fi t Maximization: Monopoly 3. Price Discrimination 4. Oligopoly?
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1 Market Equilibrium in the Long- Run Special cases: Constant cost industry Cost function of each company does not depend on number of fi rms
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Increasing cost industry Cost function of each company increasing in no. of fi rms Ex.: congestion in labor markets
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Decreasing cost industry Cost function of each company decreasing in no. of fi rms Ex.: set up o ce to promote exports
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2 Pro fi t Maximization: Monopoly Nicholson, Ch. 11, pp. 358-365 (Ch. 9, pp. 248— 255, 9th) Nicholson, Ch. 14, pp. 491-499 (Ch. 13, pp. 385— 393, 9th) Perfect competition. Firms small Monopoly. One, large fi rm. Firm sets price p to maximize pro fi ts. What does it mean to set prices? Firm chooses p, demand given by y = D ( p ) (OR: fi rm sets quantity y . Price p ( y ) = D 1 ( y ) )
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Write maximization with respect to y Firm maximizes pro fi ts, that is, revenue minus costs: max y p ( y ) y c ( y ) Notice p ( y ) = D 1 ( y ) First order condition: p 0 ( y ) y + p ( y ) c 0 y ( y ) = 0 or p ( y ) c 0 y (
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