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ch24lec

# 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.
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,
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.
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
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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