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Cowen Chapter 11 monop

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

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Chapter 11 Monopoly
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Review of Long Run Competition In the Long Run… Price = MC Firms earn Zero Economic Profit
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Our textbook authors tell us that some AIDS drugs sell for a price that is 25 times their marginal cost. How is that possible?
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Why might Price remain above MC? Market Power The “you can’t 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.
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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.
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Monopoly: A market structure with a sole provider selling a product with no close substitutes Can you think of any?
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Demand under different market structures Perfect Competition – Firms are Price Takers Monopoly – Firms are Price Searchers
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Quantity Price 0 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 0 Demand 0 2 4 6 8 10 12 0 10 20 30 Quantity Pric You be the Monopolist. You can set any price you would like. What price would you set to maximize revenue?
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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?
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For a Monopolist, MR < Price
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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 from producing one more unit So long as MR > MC, keep producing and selling units When MR = MC, stop Profit is maximized
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