Lecture3_Competition_Econ121_Fall2010

# Lecture3_Competition_Econ121_Fall2010 - Lecture 3 Monopsony...

This preview shows pages 1–9. Sign up to view the full content.

Lecture 3 Monopsony and Competition Econ 121: Industrial Organization UC Berkeley Fall 2010 Prof. Cristian

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Question 1 The market demand for heroin is said to be highly inelastic. Heroin supplied is also said to be monopolized by the Mafia, which we assume wants to maximize profits. Are these two statements consistent?
Question 1 - Response No, a profit-maximizing monopolist would never operate where the demand for its product was inelastic . Why not? Because it could raise price, by 10% say, and lose less than 10% in quantity. Hence, TR would increase. And TC would go down because it is producing less.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Question 2 A monopolist is operating at an output level where market elasticity = 3. The government imposes a quantity tax of \$6 per unit of output. If the demand curve facing the monopolist is linear, how much does the price rise?
Question 2 - Response The monopolist would raise price by \$3. The market elasticity in the case of linear demand is irrelevant .

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Taxonomy Input Market/Output Market Competitive Monopoly Competitive Firms are price taker in output market (p) and input market (w) Firm is a price maker in the output market but is a price taker in the input market (w) Monopsony Firm is a price taker in output market (p) but not in input market Firm is a price maker in both the input and output markets
Preliminary Notation Production function: q = f(x), where x are units of input Revenues : R = p∙q Marginal product of input: MP = dq/dx Marginal revenue from additional unit of output: MR = dR/dq Marginal revenue product = MR of an additional unit of input: MRP = dR/dx = MR * MP = (dR/dq)*(dq/dx)

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Monopsony - Preliminaries In order to determine how much of the input a firm employs, we have to compare the marginal revenue of an additional unit of the input (the MRP) to the marginal cost of hiring that input.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern