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

Economics 101A
(Lecture 19)
Stefano DellaVigna
November 3, 2009

Outline
1. Market Equilibrium in The Long-Run II
2. Pro fi t Maximization: Monopoly
3. Price Discrimination
4. Oligopoly?

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

• Increasing cost industry
• Cost function of each company increasing in no. of
fi rms
• Ex.: congestion in labor markets

• Decreasing cost industry
• Cost function of each company decreasing in no. of
fi rms
• Ex.: set up o ffi ce to promote exports

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 ) )

• 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
(