Lecture16 - Lecture #16 Monopoly Changes in Costs 1. We...

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Lecture #16 onopoly Monopoly Changes in Costs 1. We have already seen why a rise in fixed costs has the following effects: C, P ATC’ MC AFC + AVC = ATC P 1 MC Since MC is unchanged, X 1 and P 1 remain e same D = AR the same. This allows us to predict that economic rofits for the firm under monopoly will fall X MR X 1 profits for the firm under monopoly will fall because there is an increase in total cost but no associated change in total revenues.
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2. A rise in variable costs has the following effects: C, P C’ AVC + AFC = ATC P 2 MC MC MC P 1 C R D = AR R N M X MR X 2 X 1 As in the case of rising fixed costs, ATC shifts up and economic profits decrease. We should notice, though, that a rise in variable costs shifts MC up and to the left so that X 1 decreases to X 2 and P 1 increases to P 2 . It is important to recognize that the monopoly adjusts from M to N along their marginal revenue curve whereas the PC industry adjusts from R to C along the demand curve. Since MR is steeper than demand, the monopoly’s output falls by less and its price increases by less than the PC industry facing the same demand and the same rise in variable costs. This allows us to predict that, under monopoly, fluctuations in price and output will be relatively small when compared to those fluctuations in a PC industry.
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Maximum Price Policies and the Condition for Output Maximization l iltd i i l’ d t“h ” f fth t i A legislated maximum price on a monopoly’s product “chops” off the upper portion of the demand curve and forces the monopolist to act as a “price taker” (to some extent) and expand output. C, P P 0 MC MR = P This monopoly would normally maximize profits by selling X 0 units at P 0 . P M M at M, MR = MC A maximum price such as P M cuts off the upper segment of the demand curve, since for any output level up to e consumer cannot pay a price D = AR X MR X 0 X M X M the consumer cannot pay a price higher than P M . The monopoly’s demand thus becomes “kinked” at point M, with a perfectly elastic segment of demand up to the quantity X M and the usual downward sloping segment of demand at output levels that are higher than X M .
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Along the perfectly elastic segment of the demand curve, the monopoly is a “price taker” (as though it were a perfectly competitive firm). The last unit sold brings an addition to TR that is constant and exactly equal to the maximum price. So along thisperfectly elastic segment of demand, P = MR, just as in perfectly competitive markets. It follows that the intersection between MR and MC occurs at exactly the kink point, M, where the monopoly is best off by expanding output from X 0 to X M . We can now make four predictions about a monopoly’s response to a maximum price. Prediction 1: Price will be lower (assuming that the legislated price, P M , is lower than the monopoly’s profit maximizing price, P 0 ).
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Lecture16 - Lecture #16 Monopoly Changes in Costs 1. We...

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