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
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
MONOPOLY 10.1 Average Revenue and Marginal Revenue Slide 5

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MONOPOLY 10.1 The Monopolist’s Output Decision Slide 6
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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