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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? What causes monopolies? – a legal fiat; e.g. US Postal Service – a patent; e.g. a new drug – sole ownership of a resource; e.g. a toll highway – formation of a cartel; e.g. OPEC – large economies of scale; e.g. local utility companies.
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Pure Monopoly 3 ( ) ( ) ( ). y p y y c y ± At the profit-maximizing output level y* ² ³ d y dy d dy p y y dc y dy 3 ( ) ( ) ( ) ± 0 so, for y = y*, ² ³ d dy p y y dc y dy ( ) ( ) . 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 ³ MR y d dy p y y p y y dp y dy ( ) ( ) ( ) ( ) . ´ 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 p y ( ) ( ) ( ) ( ) ´ µ 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 2 D E and the profit-maximizing output level is y a b * ( ) ± ´ D E 2 causing the market price to be p y a by a b a b ( *) * ( ) . ± ± ± ´ 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 * ( ) ± ´ D E 2 p y a b a b ( *) ( ) ± ± ´ D E 2 a D
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Monopolistic Pricing & Own-Price Elasticity of Demand
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