Cowen Chapter 11 monop

Cowen Chapter 11 monop - Chapter 11 Monopoly Review of Long...

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Unformatted text preview: Chapter 11 Monopoly Review of Long Run Competition In the Long Run Price = MC Firms earn Zero Economic Profit Our textbook authors tell us that some AIDS drugs sell for a price that is 25 times their marginal cost. How is that possible? Why might Price remain above MC? Market Power The you cant take it with you effect The other peoples money effect Ordinarily, if a firm earns economic profit, new firms will enter and compete that profit away. If a firm can raise its price above MC without other firms entering, that firm has market power. Market Power Firms with market power maximize profit differently than firms without market power. To understand how, it is useful to examine the profit maximizing behavior of a monopoly. Monopoly: A market structure with a sole provider selling a product with no close substitutes Can you think of any? Demand under different market structures Perfect Competition Firms are Price Takers Monopoly Firms are Price Searchers Quantity Price 10.5 1 10 2 9.5 3 9 4 8.5 5 8 6 7.5 7 7 8 6.5 9 6 10 5.5 11 5 12 4.5 13 4 14 3.5 15 3 16 2.5 17 2 18 1.5 19 1 20 0.5 21 D e m a n d 2 4 6 8 1 0 1 2 0 1 0 2 0 3 0 Q u a n tity Price You be the Monopolist. You can set any price you would like. What price would you set to maximize revenue? Maximizing Profit Marginal Revenue (MR) is the additional revenue from selling one more unit In Competitive Markets MR = Price Marginal Cost (MC) is the additional cost from producing one more unit So long as MR > MC, keep producing and selling units When MR = MC, stop Profit is maximized What is different about Monopolies is that MR is no longer equal to price Remember this? For a Monopolist, MR < Price Maximizing Profit Marginal Revenue (MR) is the additional revenue from selling one more unit For firms with Market Power MR < Price Marginal Cost (MC) is the additional cost...
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This note was uploaded on 11/07/2010 for the course ECH 434 taught by Professor Dfs during the Spring '10 term at Binghamton University.

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Cowen Chapter 11 monop - Chapter 11 Monopoly Review of Long...

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