ajaz_eco_204_2012_2013_chapter_16_Market_Power

Notice that once the firm chooses that the price

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Unformatted text preview: partment of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. 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 profits (if the monopolist were risk averse or risk neutral then it would maximize the utility of profits) There is no uncertainty and the firm knows its demand and cost models. There may be a minimum output constraint: The firm may have finite capacity so that: (why?) . where (which implies that ) The profit maximizing monopolist solves the PMP: () () , ⏟ Here amount of output produced and sold into the market. Notice that once the firm chooses that the price follows from the demand model. Recognizing that the total variable cost is a function of we write the cost function as ( ) ( ). The PMP becomes: () () () , ⏟ () , ⏟ The Lagrangian equation is: , , ⏟( ) [ () [ ⏟] The FOC and KT conditions are: () ⏟ () ⏟ , , , ⏟, [ [ ⏟] As shown in chapter 14, before solving the problem...
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This document was uploaded on 01/19/2014.

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