Chapter 15 Notes - [ChapterFifteen] Monopoly...

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[Chapter Fifteen] Monopoly Learning Objectives After reading the material in this chapter, you will be able to do the following: 1. Summarize how and why the decisions facing a monopolist differ from the collective decisions of competing firms. 2. Explain why MC = MR maximizes total profit for a monopolist. 3. Determine a monopolist’s price, output, and profit graphically and numerically. 4. Show graphically the welfare loss from monopoly. 5. Explain why a price-discriminating monopolist will earn more profit than a normal monopolist. 6. Explain why there would be no monopoly without barriers to entry. 7. List three normative arguments against monopoly. Chapter Outline Monopoly Monopoly: “A market structure in which one firm makes up the entire market.” It is the polar opposite to competition. Monopolies exist because of barriers to entry (legal, sociological, natural, or technical). The Key Difference between a Monopolist and a Perfect Competitor A monopolist will reason that as it produces more, the price it can get will fall. Example: an art critic sees student’s doodles in margins of book (100 of them) and decides to sell them for $20,000 each. Student says: I’ll make 500 doodles. Art critic points out that they’re worth $20,000 each when there are only 100 of them, but only $1,000 each when there are 500.
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Increasing production doesn’t necessarily make suppliers better off. Monopolists see to it that the monopolists, not the consumers, benefit. A Model of Monopoly Determining the Monopolist’s Price and Output Numerically Table 15-1 gives the relevant data for the example: price, total revenue, marginal revenue, total cost, marginal cost, average total cost, and profit at various levels of production. The big difference between this and a competitor’s table is that marginal revenue changes and is not equal to the price. If the monopolist increases output from 4 to 5, the price it can charge falls from $24 to $21, and revenue increases from $96 to $105, so marginal revenue is $9. Marginal revenue reflects two changes: a $21 gain in revenue from selling the 5 th unit and a $12 decline in revenue because the monopolist must lower the price on the previous 4 units it produces by $3 a unit, from $24 to $21. The output decision of a monopolist affects price; marginal revenue is always below its price. The marginal revenue of increasing from 4 to 5 units is $9; the marginal cost is $16. Since marginal cost is greater than marginal revenue, increasing from 4 to 5 units will decrease profit. If the monopolist decreases output from 4 to 3, where MC < MR , the revenue it loses ($15) is greater than the reduction in cost ($8), so it will not reduce output. The monopolist in this example is maximizing profit at 4 units.
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This note was uploaded on 12/03/2011 for the course ECON 101 taught by Professor Smith during the Fall '11 term at North Shore Community College.

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Chapter 15 Notes - [ChapterFifteen] Monopoly...

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