Lecture22 - Lecture 22 More on the Lerner Index Supply...

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Lecture 22 More on the Lerner Index Supply curves for monopoly Why are there monopolies Social Costs of Monopoly
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More on the Lerner Index The Lerner Index shows that the price-cost markup as a percent of price is inversely related to the price elasticity of demand: This expression can be rearranged to relate price directly to marginal cost and the demand elasticity: d E P MC P 1 = d d d E MC P E P MC E P MC P MC P 1 1 1 1 1 1 + = → + = = =
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Exercise A monopolist firm faces a demand with constant elasticity of -2.0 It has a constant marginal cost of $20 per unit and sets a price to maximize profits. a. What is the profit-maximizing price? b. If marginal cost increases by 25%, by what percent will price increase? Hint: use the derivation from the Lerner Index: 1 1 1 1 2 2 1 1 1 1 MC MC E MC P d = + = + = 1 1 1 1 2 25 . 1 2 ) 25 . 1 ( 2 1 1 ) 25 . 1 ( 1 1 ) 25 . 1 ( P MC MC E MC P d = = + = + = 40 $ 1 = P d E MC P 1 1 + =
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Exercise Let the inverse demand function be P=10-2Q and the C(Q) = 2Q.
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This note was uploaded on 01/17/2012 for the course ECON 100A taught by Professor Safarzadeh during the Fall '09 term at UC Irvine.

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Lecture22 - Lecture 22 More on the Lerner Index Supply...

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