Lecture3_Competition_Econ121_Fall2010

Lecture3_Competition - Lecture 3 Monopsony and Competition Econ 121 Industrial Organization UC Berkeley Fall 2010 Question 1 The market demand for

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Lecture 3 Monopsony and Competition Econ 121: Industrial Organization UC Berkeley Fall 2010
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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?
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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.
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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?
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Question 2 - Response The monopolist would raise price by $3. The market elasticity in the case of linear demand is irrelevant .
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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
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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)
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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
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This note was uploaded on 02/01/2011 for the course ECON 121 taught by Professor Woroch during the Fall '07 term at University of California, Berkeley.

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Lecture3_Competition - Lecture 3 Monopsony and Competition Econ 121 Industrial Organization UC Berkeley Fall 2010 Question 1 The market demand for

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