Lecture 21-Mar 23 exam 2

Lecture 21-Mar 23 exam 2 - Announcements No office hours...

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Announcements No office hours today – I will be available by appointment on Weds. And Thurs. (and will still have normal hours on Tuesday) HW on Ch8 due tonight. It is long so give yourself time. HW on Ch9 due on THURSDAY at 11:45pm. It is also long. 1 of 38
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Monopoly vs. Perfect Competition Compared to the perfectly competitive equilibrium, monopolists choose a lower quantity and charge a higher price. By raising price and cutting quantity, monopolists steal surplus from consumers. Some of this surplus goes to firms as “producer surplus” and some is lost completely (“deadweight loss”) 2 of 38
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3 of 38 PRICE AND OUTPUT DECISIONS IN PURE MONOPOLY MARKETS PERFECT COMPETITION AND MONOPOLY COMPARED A Perfectly Competitive Industry in Long-run Equilibrium
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4 of 38 PRICE AND OUTPUT DECISIONS IN PURE MONOPOLY MARKETS Relative to a perfectly competitive industry, a monopolist restricts output, charges higher prices, and earns positive profits. They also operate at a point with higher average total costs. Comparison of Monopoly and Perfectly Competitive Outcomes for a Firm with Constant Returns to Scale PC equilibrium Monopoly Deadweight loss
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5 of 38 THE SOCIAL COSTS OF MONOPOLY INEFFICIENCY AND CONSUMER LOSS Welfare Loss from Monopoly Monopoly leads to an inefficient mix of output since P≠MC. All deadweight loss is borne by consumers. 2,500
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Monopoly vs. PC 6 of 38
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Deadweight Loss As the book notes, this DWL could be lower if the monopoly achieves some cost-saving economies of scale that many competing firms could not achieve (like a natural monopoly). However, the DWL could be even greater than seen in the graph if resources were used to achieve this monopoly power in the first place. This is called “rent seeking”. The most obvious example or rent seeking 7 of 22
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Monopoly Why are monopolies bad? 1.Result in quantity less than the optimal PC quantity (and price higher than PC price) – this causes “deadweight loss” 2.Monopolies do not have as much incentive to cut costs. And to begin with, monopolist do not operate at the minimum of ATC like PC firms do (in the long run). 8 of 38
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Cost-cutting PC firms have a big incentive to cut costs. If one firm can cut costs, that firm can earn big positive profits while other firms still earn zero profit. The cost cutting firm can still charge the market price but faces lower costs than other firms. 9 of 38
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10 of 38 Cost Reduction (P. Comp Firm) q P d=MR=AR=P* AC 1 MC 1 MC 2 AC 2 Profit q 1 q 2
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Cost-cutting While monopolies can earn MORE profit by cutting costs, the benefits are not as large as they would be for a PC firm. Empirical evidence suggests that monopolies do not try to cut costs as much as other, more competitive firms.
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This note was uploaded on 08/15/2011 for the course ECON 2005 taught by Professor Zirkle during the Spring '07 term at Virginia Tech.

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Lecture 21-Mar 23 exam 2 - Announcements No office hours...

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