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● ̅̅̅̅ ● ̅̅̅ ● ̅̅̅̅ ●̅ 5. Firms with Market Power: Revenue Maximization Problem (RMP)
In this section we model a monopolist which chooses output and sets price to maximize revenues. We assume that: The monopolist is rational in the sense that it will cease operations if The monopolist is risk neutral so that it wants to maximize total revenues (if the monopolist were risk averse or
risk neutral then it would maximize the utility of revenues) There is no uncertainty and the firm knows its demand model There may be a minimum output constraint: The firm may have finite capacity so that: . .
where (which implies that ) The revenue maximizing monopolist ignores fixed and variable costs and chooses output to maximize revenues:
⏟ ⏟ Here
amount of output produced and sold into the market. Notice that once the firm has determined the price
follows from the demand model. But first, why would a firm want to maximize revenues instead of profits? Here are
some: The managers are comp...
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This document was uploaded on 01/19/2014.
- Fall '14
- The Land