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Class 11-2010

# Class 11-2010 - Managerial Econ Class 11 Monopoly 1...

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10/14/2010 1 THE UNIVERSITY OF BRITISH COLUMBIA Managerial Econ: Class 11 Monopoly 1. Understanding Drug Prices 2. Introduction to Monopoly 3. Elasticity and Marginal Revenue 4. Inefficiency of Monopoly 5. Natural Monopoly 6. Price Discrimination THE UNIVERSITY OF BRITISH COLUMBIA Assignments a. Answers are posted. b. Comments about grading c. Regression lines, random error, and approximation

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10/14/2010 2 THE UNIVERSITY OF BRITISH COLUMBIA Clicker Question 1 – Perfect Competition Review Suppose we have a perfectly competitive industry with identical firms. In the long run the AC curve for each firm is given by AC = 150 – 20q + 2q 2 . Which statement is true? a.At the long run equilibrium MC = 100. b.At the long run equilibrium each firm produces an output of 10. c.At the long run equilibrium AC exceeds 100. d.All of the above. e.None of the above. (Draw the diagram.) THE UNIVERSITY OF BRITISH COLUMBIA 1 . Understanding Drug Prices One of the world’s best selling drugs, heart medication Plavix, sold for about \$2 per pill in 2009 but could be produced for about 3¢ per pill—less than 2% of the price. Drugs used for certain types of anemia cost patients about \$5,000 per year although production costs are a tiny fraction of this amount. How can we explain these prices? Some drugs have many close substitutes. Some have unique characteristics and are protected by patents, providing monopoly power to the firms that produce them.
10/14/2010 3 THE UNIVERSITY OF BRITISH COLUMBIA 2. Introduction to Monopoly A monopoly is the sole supplier of a good for which there is no close substitute. Monopoly is other extreme from perfect competition. Reasons for monopoly: natural monopoly, control of key input, patents, other government policies. A monopoly's output is the market output: q = Q.

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