Notes 5-Monopoly - 5. Monopoly I. Monopoly vs. Competition...

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5. Monopoly I. Monopoly vs. Competition A. The core behavioral rule is just the same. .. 1. The firm maximizes profit. max py - c ( y ) B. The resulting decision rule is the same. .. 1. The firm still sets marginal revenue equal to marginal cost. C. But the things the firm has control over have now changed. .. 1. We no longer assume that the firm is a price taker. a. Mathematically, this means that there is some functional relationship between the quan- tity the monopolist produces and the price the monopolist can charge. b. The firm’s problem is now subtly different: max p ( y ) y - c ( y ) c. In particular, marginal revenue is not pegged to some exogenously given price. II. The Monopolist’s Problem A. The real differences between monopolists and competitive firms comes on the revenue side. 1. When a competitive firm decides to change output, she only has to think about one effect. a. Revenue increases by p dy 2. Monopolists have to trade off two effects: a. Revenue increases by p dy . b. In order to sell more units, the monopolist has to lower price.
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This note was uploaded on 09/29/2010 for the course ECON 200 taught by Professor Oprea during the Fall '09 term at University of California, Santa Cruz.

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Notes 5-Monopoly - 5. Monopoly I. Monopoly vs. Competition...

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