Econ301_week6

Econ301_week6 - Econ 301 Intermediate Microeconomics Week...

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Econ 301 Intermediate Microeconomics Week 6, Jul 19-Jul 23 Jingbo Cui (ISU) Econ 301-Summer 2010 Week 6, Jul 19-Jul 23 1 / 61 Outline 1 Monopoly (Ch.11) Monopoly Proﬁt Maximization Market Power Welfare Eﬀects of Monopoly Taxes and Monopoly Government Actions That Reduce Market Power 2 Pricing and Advertising (Ch.12) Price Discriminate Perfect Price Discrimination Quantity Discrimination Multimarket Price Discrimination Two-Part Tariﬀs Advertising Jingbo Cui (ISU) Econ 301-Summer 2010 Week 6, Jul 19-Jul 23 2 / 61

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Monopoly (Ch.11) Competitive vs. Monopoly Competitive ﬁrms are price taker, facing the horizontal demand curve at the market price; Monopoly by deﬁnition is the only supplier of a good, it faces the downward sloping market demand curve, hence control the price (or quantity). Monopoly maximizes its proﬁt using a two-step procedure: - First, determining the output at which is makes the highest possible proﬁt; - Second, the ﬁrm decides whether to produce at that output level or to shut down, using the rules described in Chapter 8. Jingbo Cui (ISU) Econ 301-Summer 2010 Week 6, Jul 19-Jul 23 3 / 61 Monopoly (Ch.11) Monopoly Proﬁt Maximization Monopoly Proﬁt Maximization A monopoly maximizes its proﬁt by setting its price or output so that its marginal revenue equals its marginal cost. A monopoly’s proﬁt function is π ( Q ) = R ( Q ) - C ( Q ), where R ( Q ) is its revenue function, and C ( Q ) is its cost function. 1 The necessary condition: d π ( Q * ) dQ = dR ( Q * ) dQ - dC ( Q * ) dQ = 0 MR ( Q * ) = MC ( Q * ) Thus marginal revenue equals its marginal cost. 2 The suﬃcient condition: d 2 π ( Q * ) dQ 2 = d 2 R ( Q * ) dQ 2 - dC 2 ( Q * ) dQ 2 < 0 Jingbo Cui (ISU) Econ 301-Summer 2010 Week 6, Jul 19-Jul 23 4 / 61
Monopoly (Ch.11) Monopoly Proﬁt Maximization Marginal Revenue and the Demand Curves A monopoly’s marginal revenue curve is downward sloping and lies below its demand curve at any positive quantities because its demand curve is downward sloping. MR ( Q ) = dR ( Q ) dQ = dp ( Q ) Q dQ = p ( Q ) + dp ( Q ) dQ Q Thus at a given positive quantity, a monopoly’s marginal revenue is less than its price or average revenue by [ dp ( Q ) / dQ ] Q . That is, a monopoly’s marginal revenue curve lies below its inverse demand curve at any positive quantity. Jingbo Cui (ISU) Econ 301-Summer 2010 Week 6, Jul 19-Jul 23 5 / 61 Monopoly (Ch.11) Monopoly Proﬁt Maximization Graphical Interpretation Figure 11.1 illustrates the reason a monopoly’s marginal revenue is less than its price. Jingbo Cui (ISU) Econ 301-Summer 2010 Week 6, Jul 19-Jul 23 6 / 61

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Monopoly (Ch.11) Monopoly Proﬁt Maximization Questions Q: What is the monopoly’s initial revenue when quantity is Q?
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Econ301_week6 - Econ 301 Intermediate Microeconomics Week...

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