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Chapter 24 MONOPOLY

Chapter 24 MONOPOLY. 24.1 Maximizing profits. The monopolist will always set p = p ( y ). r ( y )= p ( y ) y The monopolist’s profit-maximization problem then takes the form. F.O.C.: MR=MC. 24.1 Maximizing profits. △ r = p △ y + y △ p. Marginal revenue in terms of elasticity.

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Chapter 24 MONOPOLY

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  1. Chapter 24 MONOPOLY

  2. 24.1 Maximizing profits • The monopolist will always set p=p(y). • r(y)=p(y)y • The monopolist’s profit-maximization problem then takes the form • F.O.C.: MR=MC

  3. 24.1 Maximizing profits • △r=p△y+y△p • Marginal revenue in terms of elasticity

  4. 24.1 Maximizing profits • The F.O.C. becomes • Maximum can only occur where ||≥1.

  5. 24.2 Linear Demand Curve and Monopoly • Linear demand: p(y)=a-by • Revenue: r(y)=p(y)y=ay-by2 • Marginal revenue: MR(y)=a-2by • The marginal revenue curve is steeper than the demand curve. • The optimal output is given by the intersection of the marginal revenue curve and the marginal cost curve. • The price is determined by the output and the demand curve.

  6. 24.2 Linear Demand Curve and Monopoly • Monopoly with a linear demand curve

  7. 24.3 Markup Pricing • The market price is a markup over marginal cost. • The amount of the markup depends on the elasticity of demand.

  8. EXAMPLE: The Impact of Taxes on a Monopolist • Linear demand and taxation • The price will rise by half the amount of the tax. • Price will increase by more or less than the amount of the tax for other demand functions.

  9. 24.4 Inefficiency of Monopoly • The monopolist charges a price higher than marginal cost. • The monopolistic output is lower than the competitive output. • The monopolistic market is Pareto inefficient. • The monopolist is better off than in the competitive market.

  10. 24.4 Inefficiency of Monopoly • Loss in consumer’s surplus: A+B • Increase in producer’s surplus: A-C • Loss in welfare: B+C

  11. 24.6 Natural Monopoly • Large fixed costs but small marginal cost. • Competitive price is lower than the average cost. • A competitive firm will make losses. • The firm need to charge the average cost to break even. • Output is lower than the efficient level. • Cost measuring is critical.

  12. 24.6 Natural Monopoly

  13. 24.6 What Causes Monopolies? • Minimum efficient scale (MES): the level of output that minimizes average cost. • A small market size is prone to monopoly.

  14. 24.6 What Causes Monopolies? • Cartel: Several firms in an industry collude and restrict output in order to maximize total profits. • OPEC, De Beers.

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