Week8.Monopoly.2010 - ECMA04HWeekEight The Monopoly Model a.

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ECMA04H – Week Eight The Monopoly Model a. The monopoly model.  How does monopolist  behave?  What are the results?   b. Inefficiency and monopoly.  Dynamic efficiency  vs. allocative efficiency. c. Where does monopoly come from; what  conditions are necessary; what are the public  policy responses? d. Excise tax on a monopoly 1
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Only one supplier.  Entry to market is blocked. Single seller faces entire market demand curve (price  maker, not price taker) 2 AC 0 MC Price per unit quantity Quantity produced per unit of time MR Demand
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What about Marginal Revenue (MR)? MR = dTR/dq or dTR/dQ TR = P x Q.  To PC firm, P was a constant (price taker) To monopolist, P is a choice variable, so we must treat  P as a function of Q So, MR =  Or MR =  3
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For a linear demand curve P = a – bQ, so… TR =  MR =  So MR has the same intercept and twice the slope of  the linear demand curve 4
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Algebraic example of monopoly industry Market Demand: P = 100 - .02Q So, Total Revenue = TR = PxQ =  Marginal Revenue = dTR/dQ =  (marginal revenue is the rate at which total revenue is  changing as output increases) 5
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Assume total cost function of monopoly firm is: TC = .01q 2  + 10q + 432 or .01Q 2  + 10Q + 432 So, MC =    (Marginal Cost is the rate at which total cost is  changing as output increases) and AC =  6
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We can solve by forming the profit function and  maximizing with respect to Q Π  = TR – TC = (100Q - .02Q 2 ) – (.01Q 2  + 10Q + 432)  = 90Q - .03Q 2  – 432 Therefore, d Π /dQ =  Setting = 0, we have .06Q = 90 or Q* = 1500 Substituting into the demand function, we have P* =  100 - .02(1500)= $70 7
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Alternative (easier) solution method We can set MC = MR and solve for Q MC = .02Q + 10 MR = 100 - .04Q .02Q + 10 = 100 - .04Q .06Q = 90 Q* = 1500 Substituting into the demand function, we have P* =  100 - .02(1500)= $70 8
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How much is the profit of the monopolist? Where is the monopolist’s supply curve? What about the long run? 9
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Is the monopolist efficient?   Several perspectives: Does the monopolist minimize costs? Does the monopolist produce at q minLRAC ? 10
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Is marginal benefit equal to marginal cost at the  monopolist’s equilibrium output? 11
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Does the monopolist’s output maximize the Gain to  Society? How do we measure Gain to Society (GTS)?
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This note was uploaded on 08/17/2011 for the course ECON A04 taught by Professor Mk during the Fall '07 term at University of Toronto- Toronto.

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Week8.Monopoly.2010 - ECMA04HWeekEight The Monopoly Model a.

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