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Week10 Handout (6pp)(1)

# Week10 Handout (6pp)(1) - Pure Monopoly Monopoly A...

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4/10/2011 1 1 Monopoly Chapter 24 (Sections 1 to 5) Pure Monopoly 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. Pure Monopoly Output Level, y \$/output unit p(y) Higher output y causes a lower market price, p(y). 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. Pure Monopoly Suppose that the monopolist seeks to maximize its economic profit, What output level y* maximizes profit? ( ) ( ) ( ). y p y y c y Profit-Maximization ( ) ( ) ( ). y p y y c y At the profit-maximizing output level y* d y dy d dy p y y dc y dy ( ) ( ) ( ) 0 so, for y = y*, d dy p y y dc y dy ( ) ( ) .

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4/10/2011 2 7 y \$ R(y) = p(y)y Profit-Maximization 8 \$ R(y) = p(y)y c(y) Profit-Maximization y 9 Profit-Maximization \$ R(y) = p(y)y c(y) y (y) 10 Profit-Maximization \$ R(y) = p(y)y c(y) y (y) y* 11 Profit-Maximization \$ R(y) = p(y)y c(y) y (y) y* 12 Profit-Maximization \$ R(y) = p(y)y c(y) y (y) y*