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Week10 updated Handout (6pp) - Copy

# Week10 updated Handout (6pp) - Copy - Pure Monopoly A...

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5/11/2011 1 1 Monopoly Chapter 24 (Sections 1 to 5) Pure Monopoly A monopolized market has a single seller. The monopolist’s demand curve is the (downward sloping) market demand curve. So the monopolist can alter the market price by adjusting its output level. Pure Monopoly Output Level, y \$/output unit p(y) Higher output y causes a lower market price, p(y). Why Monopolies? What causes monopolies? – a legal fiat; e.g. US Postal Service – a patent; e.g. a new drug – sole ownership of a resource; e.g. a toll highway – formation of a cartel; e.g. OPEC – large economies of scale; e.g. local utility companies. Pure Monopoly Suppose that the monopolist seeks to maximize its economic profit, What output level y* maximizes profit? ( ) ( ) ( ). y p y y c y Profit-Maximization ( ) ( ) ( ). y p y y c y At the profit-maximizing output level y*   d y dy d dy p y y dc y dy ( ) ( ) ( ) 0 so, for y = y*,   d dy p y y dc y dy ( ) ( ) .

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5/11/2011 2 7 y \$ R(y) = p(y)y Profit-Maximization 8 \$ R(y) = p(y)y c(y) Profit-Maximization y 9 Profit-Maximization \$ R(y) = p(y)y c(y) y (y) 10 Profit-Maximization \$ R(y) = p(y)y c(y) y (y) y* 11 Profit-Maximization \$ R(y) = p(y)y c(y) y (y) y* 12 Profit-Maximization \$ R(y) = p(y)y c(y) y (y) y*
5/11/2011 3 Profit-Maximization \$ R(y) = p(y)y c(y) y (y) y* At the profit-maximizing output level the slopes of the revenue and total cost curves are equal; MR(y*) = MC(y*). Marginal Revenue Marginal revenue is the rate-of-change of revenue as the output level y increases;   MR y d dy p y y p y y dp y dy ( ) ( ) ( ) ( ) . dp(y)/dy is the slope of the market inverse demand function so dp(y)/dy < 0. Therefore MR y p y y dp y dy p y ( ) ( ) ( ) ( ) for y > 0. Marginal Revenue

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Week10 updated Handout (6pp) - Copy - Pure Monopoly A...

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