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•Given an linear inverse demand function, where , the associated marginal revenue is8-26Monopoly
Marginal Revenue In Action•Suppose the inverse demand function for a monopolist’s product is given by . What is the maximum price per unit a monopolist can charge to be able to sell 3 units? What is marginal revenue when ?Monopoly
Output Rule•A profit-maximizing monopolist should produce the output, , such that marginal revenue equals marginal cost:8-28Monopoly
Costs, Revenues, and Profit In Action8-29MonopolyOutput$0Cost functionSlope ofSlope ofRevenue functionMaximum profit
PriceQuantityDemandMRMCATC)ProfitsProfit Maximization In ActionMonopoly8-30
Pricing Rule•Given the level of output, , that maximizes profits, the monopoly price is the price on the demand curve corresponding to the units produced:8-31Monopoly
Monopoly In Action•Suppose the inverse demand function for a monopolist’s product is given by and the cost function is . Determine the profit-maximizing price, quantity and maximum profits.Monopoly
Absence of a Supply Curve8-33Monopoly•Recall, firms operating in perfectly competitive markets determine how much output to produce based on price ().–Thus, a supply curve exists in perfectly competitive markets.•A monopolist’s market power implies .–Thus, there is no supply curve for a monopolist, or in markets served by firms with market power.
Multiplant Decisions•Often a monopolist produces output in different locations. –Implications: manager has to determine how much output to produce at each plant.•Consider a monopolist producing output at two plants:–The cost of producing units at plant 1 is , and the cost of producing at plant 2 is .–When the monopolist produces a homogeneous product, the per-unit price consumers are willing to pay for the total output produced at the two plants is , where .8-34Monopoly
Multiplant Output Rule•Let be the marginal revenue of producing a total of units of output. •Suppose the marginal cost of producing units of output in plant 1 is and that of producing units in plant 2 is . •The profit-maximizing rule for the two-plant monopolist is to allocate output among the two plants such that:8-35Monopoly
Implications of Entry Barriers•A monopolist may earn positive economic profits, which in the presence of barriers to entry prevents other firms from entering the market to reap a portion of those profits.–Implication: monopoly profits will continue over time provided the monopoly maintains its market power.•Monopoly power, however, does not guarantee positive profits.8-36Monopoly
PriceQuantityDemandMRMCATCZero-Profit Monopolist In ActionMonopoly8-37
Deadweight Loss of Monopoly•The consumer and producer surplus that is lost due to the monopolist charging a price in excess of marginal cost.8-38Monopoly
PriceQuantityDemandMRMCDeadweight Loss of Monopolist In ActionMonopoly8-39Deadweight loss
Monopolistic Competition: Key Conditions•An industry is monopolistically competitive if:–There are many buyers and sellers.–Each firm in the industry produces a differentiated product.–There is free entry into and exit from the industry.