ch24lec - Chapter 24 Monopoly By Rust, Cho, Juan Pure...

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Chapter 24 Monopoly By Rust, Cho, Juan
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Pure Monopoly Output Level, y $/output unit p(y) Higher output y causes a lower market price, p(y). A monopolized market has a single seller. The monopolist’s demand curve is the (downward sloping) market demand curve. So the monopolist can alter the market price by adjusting its output level.
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Why Monopolies? •W h a t c a u s e s m o n o p o l i e s ? –a lega l f iat; e.g. US Posta l Serv ice –a patent; e.g. a new drug –so le ownersh ip of a resource; e.g. a to l l highway – formation of a cartel; e.g. OPEC –large econom ies of sca le; e.g. loca l ut i l ity companies.
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Pure Monopoly 3 () . yp y y c y ± At the profit-maximizing output level y* ²³ dy d pyy dc y 3 ± 0 so, for y = y*, d . Suppose that the monopolist seeks to maximize its economic profit,
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Profit-Maximization $ R(y) = p(y)y c(y) y 3 (y) y* At the profit-maximizing output level the slopes of the revenue and total cost curves are equal; MR(y*) = MC(y*).
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Marginal Revenue Marginal revenue is the rate-of-change of revenue as the output level y increases; ±² MR y d dy pyy py y dp y dy () . ³ dp(y)/dy is the slope of the market inverse demand function so dp(y)/dy < 0. Therefore MR y p y y dp y dy py ³ ´ for y > 0.
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Marginal Revenue E.g. if p(y) = a - by then R(y) = p(y)y = ay - by 2 and so MR(y) = a - 2by < a - by = p(y) for y > 0. p(y) = a - by a y a/b MR(y) = a - 2by a/2b
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Profit-Maximization; An Example At the profit-maximizing output level y*, MR(y*) = MC(y*). So if p(y) = a - by and if c(y) = F + D y + E y 2 then MR y a by y MC y (* ) * * ) ± ² 22 D E and the profit-maximizing output level is y a b * () ± ² D E 2 causing the market price to be py a by a b a b ) * . ± ± ± ² D E 2
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Profit-Maximization; An Example $/output unit y MC(y) = D + 2 E y p(y) = a - by MR(y) = a - 2by y a b * () ± ² D E 2 py ab a b (* ) ± ± ² D E 2 a D
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Monopolistic Pricing & Own-Price Elasticity of Demand •S u p p o s e t h a t m a r k e t d e m a n d b e c o m e s l e s s s e n s i t i v e t o changes in price ( i.e . the own-price elasticity of demand
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This note was uploaded on 10/25/2011 for the course ECON 326 taught by Professor Hulten during the Spring '08 term at Maryland.

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ch24lec - Chapter 24 Monopoly By Rust, Cho, Juan Pure...

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