monopoly-ho_003

monopoly-ho_003 - Monopoly Quantity& Price Elasticity...

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Unformatted text preview: Monopoly Quantity & Price Elasticity Welfare Monopoly Chapter 24 monoply.gif (GIF Image, 289x289 pixels) http://i4.photobu Monopoly Quantity & Price Elasticity Welfare Motivating Questions • What price and quantity does a monopoly choose? • What are the welfare effects of monopoly? • What are the effects of taxes on monopolies? • Is monopoly every justified/efficient? Monopoly Quantity & Price Elasticity Welfare What is a monopoly? • A monopoly is a sole supplier of a good. • The monopolist’s demand curve is the market demand curve. • Price maker not a price taker • Can set price (quantity is constrained by demand curve relationship) • Or: chooses quantity, which determines price Monopoly Quantity & Price Elasticity Welfare What causes monopolies? • Legal fiat: US Postal Service • Patent: drugs, technology; intellectual property • Sole ownership of a resource: toll road • Cartel: OPEC • Large economies of scale: local utilities Monopoly Quantity & Price Elasticity Welfare Government & Monopoly Monopoly is heavily regulated • Antitrust Law: abuse of monopoly power is a felony • Dept. of Justice (DOJ) has antitrust division • Federal Trade Commission (FTC) has regulatory oversight But govt. creates monopolies (USPS) and issues patents/copyrights that grant monopoly power. If if monopoly is so bad, why does the government enable it in some cases? Monopoly Quantity & Price Elasticity Welfare What quantity maximizes profits? Setup the problem: • For any firm, profit is given by Π( y ) = R ( y )- C ( y ) , where R ( y ) is revenue and C ( y ) is cost. • Profit maximization problem: max y R ( y )- C ( y ) Monopoly Quantity & Price Elasticity Welfare What quantity maximizes profits? Graphical analysis: y $ R(y) = p(y)y Monopoly Quantity & Price Elasticity Welfare What quantity maximizes profits?...
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monopoly-ho_003 - Monopoly Quantity& Price Elasticity...

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