Chapter 10 Market Structure and Competitive Strategy

# Chapter 10 Market Structure and Competitive Strategy - How...

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1 Market Power: Monopoly and Monopsony Chapter 10 Tuitional EBA Microeconomics How Monopoly Arises • No close substitutes • Barriers to Entry Monopoly • As the sole producer of a product. • Control the amount of output offered for sale (but not the Price) • Maximize profit: decide how much to produce and sell. Average Revenue and Marginal Revenue Average Revenue. - The price it receives per unit sold. AR = Marginal Revenue - The change in revenue that results from a unit change in output. MR =

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2 •Ex Demand curve: P = 6 - Q --------------------------------------------------------------------- PQ T R M R A R ---------------------------------------------------------------------------- • Plots AR and MR Note: The marginal revenue curve has twice the slope of the demand curve (AR curve) The Monopolist’s Output Decision MR = MC Profits = Revenue - Cost Ex - The cost function: C(Q) = 50 + Q 2 - The demand function: P(Q) = 40 – Q Find Q, P, TR, TC, and Profits.
3 A Rule of Thumb for Pricing • Easily applied in practice. P – MC = - 1 PE d •EX : Suppose a profit-maximizing monopolist is producing 800 units of output and is charging a price of \$40 per unit. a) If the elasticity of demand is -2, find the MC of the last unit produced. b) What is the firm’s percentage markup of price over marginal cost? c) Suppose that the average cost of the last unit. produced is \$15. Find the firm’s profit. The Effect of a Tax • In competitive industry, when we imposed a tax, the burden of the tax is shared by consumer and producer. • Under Monopoly, price can sometimes rise by more than the amount of the tax. * The Multiplant Firm • For many firms, production takes place in two or more different plants whose operating costs differ.

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## This note was uploaded on 10/13/2010 for the course ECON Mi22 taught by Professor Miko during the Spring '10 term at UC Riverside.

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Chapter 10 Market Structure and Competitive Strategy - How...

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