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ch11 - Chapter 11 Monopoly Monopsony 1 Chapter Eleven...

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1 Monopoly & Monopsony Chapter 11
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2 Chapter Eleven Overview 1. The Monopolist’s Profit Maximization Problem The Profit Maximization Condition Equilibrium The Inverse Pricing Elasticity Rule 2. Multi-plant Monopoly and Cartel Production 1. The Welfare Economics and Monopoly Chapter Eleven
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3 Chapter Eleven A Monopoly Definition: A Monopoly Market consists of a single seller facing many buyers. The monopolist's profit maximization problem: Max π (Q) = TR(Q) - TC(Q) Q where : TR(Q) = QP(Q) and P(Q) is the (inverse) market demand curve. The monopolist's profit maximization condition: TR(Q)/ Q = TC(Q)/ Q MR(Q) = MC(Q)
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4 Chapter Eleven A Monopoly – Profit Maximizing Along the demand curve, different revenues for different quantities Profit maximization problem is the optimal trade-off between volume (number of units sold) and margin (the differential between price). Monopolist’s demand Curve is downward-sloping
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5 Chapter Eleven A Monopoly – Profit Maximizing Demand Curve: Total Revenue: Total Cost (Given): Profit-Maximization: MR = MC Q Q P - = 12 ) ( 2 12 ) ( ) ( Q Q Q P Q Q TR - = × = 2 2 1 ) ( Q Q TC =
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6 Chapter Eleven A Monopoly – Profit Maximizing As Q increases TC increases, TR increases first and then decreases. Profit Maximization is at MR = MC
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7 Chapter Eleven A Monopoly – Profit Maximizing MR>MC, firm can increase Q and increase profit MR<MC, firm can decrease quantity and increase profit MR=MC , firm cannot increase profit. Profit Maximizing Q: *) ( *) ( Q MC Q MR =
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8 P 0 P 0 P 1 C A B Q 0 Q 0 +1 q q+1 Competitive Firm Monopolist Demand facing firm Demand facing firm A B Price Price Firm output Firm output Chapter Eleven Marginal Revenue
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9 The MR curve lies below the demand curve. Price Quantity P(Q), the (inverse) demand curve MR(Q), the marginal revenue curve Q 0 P(Q 0 ) MR(Q 0 ) Chapter Eleven Marginal Revenue Curve and Demand
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10 Chapter Eleven Marginal Revenue Curve and Demand To sell more units, a monopolist has to lower the price. Increase in profit is Area III while revenue sacrificed at a higher price is Area I Change in TR equals area III – area I
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11 Chapter Eleven Marginal Revenue Curve and Demand Area III = price x change in quantity = P( Δ Q) Area I = - quantity x change in price = -Q ( Δ P) Change in monopolist profit: P( Δ Q) + Q ( Δ P) Q P Q P Q P Q Q P Q TR MR + = + = =
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12 Chapter Eleven Marginal Revenue Marginal revenue has two parts: P : increase in revenue due to higher volume-the marginal units Q( Δ P/ Δ Q) : decrease in revenue due to reduced price of the inframarginal units. The marginal revenue is less than the price the monopolist can charge to sell that quantity for any Q>0
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13 Chapter Eleven Average Revenue Since The price a monopolist can charge to sell quantity Q is determined by the market demand curve the monopolists’ average revenue curve is the market demand curve.
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