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Example 3: Suppose a monopolist has a linear demand curve: Assume that , and that the firm has constant returns: Solve the RMP:
The RMP becomes:
() [ ⏟
⏟ Now we need to check the conditions for each of the following cases:
Monopoly Revenue Maximization Problem
When neither Case B or C occur
⏟ found by ()
Now: Let’s check when Case B occurs:
Notice that unconstrained solution. If case B occurs then: In case B the Lagrange multipliers will be:
ECO 204 Chapter 16: Analysis of Firms with Market Power (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. () Let’s check when Case C occurs:
Since this company will always produce a positive output. If neither case B or C occur (which means that as long as ) then the solution must be Case D and output will be: If case D occurs then:
( ) In case Dthe Lagrange multipliers will be: __________________________________________________________________________________________________
Example 4: Suppose a mon...
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This document was uploaded on 01/19/2014.
- Fall '14
- The Land