Fitch%20-%20Class18%20F10-%20Monopoly

Fitch%20-%20Class18%20F10-%20Monopoly - Fall 2010...

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Fall 2010 UGBA101A-03 Microeconomic Analysis for Business Decisions Class 18 Prof. Todd Fitch
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Learning Objectives Understand and describe how a monopoly is different than a competitive market Understand how to set price and output How to measure monopoly power Slide 2 Describe where monopoly power originates Describe the social impacts of monopolies and how to regulate them
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uni25CF monopoly Market with only one seller. uni25CF monopsony Market with only one buyer. Market Power: Monopoly and Monopsony Slide 3 uni25CF market power Ability of a seller or buyer to affect the price of a good.
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MONOPOLY 10.1 Average Revenue and Marginal Revenue uni25CF marginal revenue Change in revenue resulting from a one-unit increase in output. TABLE 10.1 Total, Marginal, and Average Revenue To see the relationship among total, average, and marginal revenue, consider a firm facing the following demand curve: P = 6 – Q Slide 4 Total Marginal Average Price (P) Quantity (Q) Revenue (R) Revenue (MR) Revenue (AR) $6 0 $0 --- --- 5 1 5 $5 $5 4 2 8 3 4 3 3 9 1 3 2 4 8 -1 2 1 5 5 -3 1
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MONOPOLY 10.1 Average Revenue and Marginal Revenue Slide 5
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MONOPOLY 10.1 The Monopolist’s Output Decision Slide 6
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MONOPOLY 10.1 The Monopolist’s Output Decision We can also see algebraically that Q * maximizes profit. Profit π is the difference between revenue and cost, both of which depend on Q : As Q is increased from zero, profit will increase until it reaches a maximum and then begin to decrease. Thus the profit-maximizing Slide 7 Q is such that the incremental profit resulting from a small increase in Q is just zero (i.e., π / Q = 0). Then But R / Q is marginal revenue and C / Q is marginal cost. Thus the profit-maximizing condition is that , or
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MONOPOLY 10.1 A Rule of Thumb for Pricing We want to translate the condition that marginal revenue should equal marginal cost into a rule of thumb that can be more easily applied in practice.
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