Ec101F10L9_12_101115

# Ec101F10L9_12_101115 - Economics 101 UCLA Fall 2010 Jernej...

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Unformatted text preview: Economics 101, UCLA Fall 2010 Jernej Copic Lectures 9-12 10/28/10, 11/2/10, 11/4/10, and 11/9/10. Demand and pricing: monopoly, price competition (Bertrand), quantity competition (Cournot: duopoly, and oligopoly). No1 was back in the shop, and he was writing an entry in his diary. It went as follows. Demand. “It is now weeks later, and Alan wants to buy flower pots. As far as I know, he is considering buying up to a hundred flower pots in order to decorate his new apartment. His valuation for the zeroth pot is \$100, for the first pot it is \$99, he values the second pot at \$98, the third at \$97, and so on – he is only willing to get the 100th pot if it comes for free, and he doesn’t want the 101st flower pot at all. I am absolutely positive about that, as I tested him on a whole bunch of different prices in the past, so I know very well that he has this sort of demand. 1 As I write this, I am also thinking that it wouldn’t really matter if there were 100 potential customers for the flower pots, each one of them desired only one flower pot, and they had different willingness to pay for the one flower pot they desired. But I want to simplify things even further. I will think of flower pots that can b cut in small pieces, and just approximate the whole situation with a continuous demand function (it is a function of the price). Obviously, here the right linear function is Q ( P ) = K- P , where Q is the quantity demanded at a price P , and K is a parameter which I obtained from estimating Alan’s demand: K = 100. But hey! – K then also represents the maximum price that anyone is willing to pay for the flower pots, and at the same time the maximal quantity that would ever possibly be sold here. I understand that I can’t really cut flower pots but as an approximation which should simplify my calculations, this should work pretty well (in that sense, this is probably a better approximation for cocoa powder, for instance). In any case, 1 Exercise. Suppose there was only one flower pot and you wanted to figure out how much Alan is willing to pay for it - how would you do that (see also Lecture 1 and the midterm 1). 1 Alan is the consumer in my model, and he has the demand Q = K- P , where K = 100. Monopolist. Now, in my shop there are only two people who can produce flower pots: Grunf and Cariatide; and Cariatide enjoys it so much, that for him, the cost of producing a flower pot is literally a money equivalent of 0 - even after accounting for the materials. First, suppose that I send Grunf to a study-abroad trip in order to improve his skills of flower pot making. Cariatide will then be the only one left in the shop who can produce flower pots, and I will require him to charge the same price for every flower pot that he sells (so he cannot offer quantity discounts). Cariatide is good at it, so his production cost is essentially \$0 per flower pot, and it is constant. In other words, he will be a monopolist producer, his production cost will be \$0, and he will be facing Alan’s demand for the flower pots. Cariatide and Alan are thenbe \$0, and he will be facing Alan’s demand for the flower pots....
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## This note was uploaded on 09/05/2011 for the course ECON 101 taught by Professor Buddin during the Fall '08 term at UCLA.

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Ec101F10L9_12_101115 - Economics 101 UCLA Fall 2010 Jernej...

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