Lec_07_cartels

# Lec_07_cartels - Chapter 9: Monopoly, Oligopoly, and...

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1 • First in-class exam on Monday, Oct 17 • Exam covers Chapters 7 and 9 • Answers to practice exam will be reviewed in discussion sections between Monday Oct 10 - Friday Oct 14 • A second practice exam can be downloaded from course web page and reviewed on your own Chapter 9: Monopoly, Oligopoly, and Monopolistic Competition G. Price discrimination H. Natural monopoly I. Where does monopoly or oligopoly come from? 1. Cartels or producer co-operatives Definition: A cartel is a group of producers who agree to restrict output in order to raise the price Obstacles to running a cartel: (1) They’re illegal in the United States OPEC: Organization of Petroleum Exporting Countries Obstacles to running a cartel : (1) They’re illegal in the United States. (2) Each member of a cartel has an incentive to cheat on their agreement.

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2 Example: consider a cartel consisting of 10 countries each producing 2 million barrels of oil per day. Marginal cost of production: • Physical cost of added production • Opportunity cost (oil may be worth more next year) Suppose total marginal cost is \$50/barrel and current price is \$81.50/barrel Suppose further that if OPEC increased production 1 million barrels per day, price would fall from \$81.50/barrel to \$80/barrel Then the marginal revenue for OPEC as a whole from producing another million barrels per day is: \$80/b x 1 M b/day - \$1.50/b x 20 M b/day = \$50 M /day Marginal cost we supposed was \$50/b, so additional cost of producing extra 1 M b/day is \$50 M Conclusion: MR = MC = \$50 M So for these figures, OPEC would be maximizing the collective profit of all its members if it charged a price of \$81.50 However, suppose one country (say Kuwait) by itself could produce an extra 1 M b/day
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## This note was uploaded on 03/02/2012 for the course ECON 2 taught by Professor Kim during the Fall '08 term at UCSD.

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Lec_07_cartels - Chapter 9: Monopoly, Oligopoly, and...

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