•Given an linear inverse demand function, where , the associated marginal revenue is8-26
Monopoly

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:
8-28
Monopoly

Costs, Revenues, and Profit In Action
8-29
Monopoly
Output
$
0
Cost function
Slope of
Slope of
Revenue function
Maximum
profit

Price
Quantity
Demand
MR
MC
ATC
)
Profits
Profit Maximization In Action
Monopoly
8-30

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:
8-31
Monopoly

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 Curve
8-33
Monopoly
•
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 .
8-34
Monopoly

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:
8-35
Monopoly

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.
8-36
Monopoly

Price
Quantity
Demand
MR
MC
ATC
Zero-Profit Monopolist In Action
Monopoly
8-37

Deadweight Loss of Monopoly
•
The consumer and producer surplus that is
lost due to the monopolist charging a price in
excess of marginal cost.
8-38
Monopoly

Price
Quantity
Demand
MR
MC
Deadweight Loss of Monopolist In Action
Monopoly
8-39
Deadweight loss