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Unformatted text preview: 1 Section Notes Week 2 Outline Key Concepts Announcements Externality Numerical Example Over or Under Production Welfare Graphing Regulation Discussion Internalization Calculating Outcomes Competition Monopoly Monopsony Middleman Social Planner M. Benefit MPB MR MPB MR MSB=MPB+MEB M. Cost MPC MPC MO MO MSC=MPC+MEC Solution MPB=MPC MR=MPC MPB=MO MR=MO MSB=MSC Recall that: MR = d d Q Revenue = d d Q (Q MPB(Q)) = MPB(Q) + Q d d Q MPB(Q) MO = d d Q Outlay = d d Q (Q MPC(Q)) = MPC(Q) + Q d d Q MPC(Q) Putting numbers to it Let marginal private benefit of output Q be given by P = 12 Q , marginal private cost by P = 2 Q . Suppose that production generates a negative externality, with marginal cost as a function of output given by MEC = 1 . 5 + 0 . 5 Q . Lets assume there are no positive externalities. Find the equations for: MR: Revenue = (12 Q ) Q = 12 Q Q 2 . MR = d d Q (12 Q Q 2 ) = 12 2 Q MO: Outlay = (2 Q ) Q = 2 Q 2 . MO = d d Q (2 Q 2 ) = 4 Q MSB: MSB = MPB + MEB. MEB is zero, so MSB = MPB = 12 Q MSC: MSC = MPC + MEC = (2 Q ) + (1 . 5 + 0 . 5 Q ) = 1 . 5 + 2 . 5 Q Now were going to go through the case of (perfect) competition. Solve out the competitive case quantity and price ( Q C ,P C ). Q C : Set MPB=MPC, so 12 Q = 2 Q , which can be arranged to find Q = 12 / 3 = 4 . P C : This quantity is then plugged into demand to find price: P = 12 4 = 8 . 2 Next find the socially optimal quantity and price ( Q * ,P * ). Try solving out the other outcomes if you have time. Q * : Set MSB=MSC, so 12 Q = 1 . 5 + 2 . 5 Q , which results in Q = 10 . 5 / 3 . 5 = 3 . P * : This quantity is then plugged into demand to find price: P = 12 3 = 9 . Q M : Set MR=MPC, so 12 2 Q = 2 Q , which can be arranged to find Q = 12 / 4 = 3 . P M : This quantity is then plugged into demand to find price: P = 12 3 = 9 . Q N : Set MPB=MO, so 12 Q = 4 Q , which can be arranged to find Q = 12 / 5 = 2.4 ....
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This note was uploaded on 09/24/2011 for the course ECON C125 taught by Professor Zelberman during the Spring '09 term at University of California, Berkeley.
 Spring '09
 ZELBERMAN
 Monopoly

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