Micro.Week9.2007

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9/1 Return to monopoly problem we did last week: TC = 100 + 4q + q 2 demand given by P = 44 - q = 44 - Q q = 10, P = 34, / = 340 - 240 = 100 Now imagine that we place an excise tax of \$4 on buyers. P B = 44 - Q P S = 40 - Q Solve for two prices: q = 9, P B = 35, P S = 31, / = 279 - 217 = 62 Who bears the tax?

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9/2 Diagram:
9/3 Now: new topic: can we compare monopoly and competition ? Problem is that this involves classic problem of comparing apples and oranges, since there is usually something different about two industries. What we do is to imagine that we are taking a competitive industry and then allowing someone to buy it and enforce a monopoly: same fundamental industry, two different structures eg. Imagine competitive industry with min LAC at q = 10, AC = \$20 Demand P = 60 - .01Q To compare monopoly and competition: solve for competitive outcome and monopoly outcome. First, competitive equilibrium: min LAC at q = 10, AC = \$20, So P = \$20 20 = 60 - .01Q Q = 40/.01 = 4000 N = 4000/10 = 400 / = 0 (as usual)

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