Notes Week 1-4
Notes Week 1-4 CIS 150
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Date Created: 08/29/15
Monopoly s price and output decisions Monopoly is a price maker A Revenue TRpxq The monopoly s revenue has an output effect and a price effect Output effect increase in quantity l increase in total revenue Price effect increase in quantity l decrease in price To sell in the monopoly has to change less The monopoly price is limited by market demand P demand Average Revenue AR TRq pxqq p demand AR p demand Marginal Revenue MR lt p How much the rm gets for an additional good must be less than the price To sell more rm must average less Monopoly s Pro t A monopoly is a pro t maximize Choose q so that MR MC Pro t pie PATCq In the LR the competitive rm earns zero pro t But the monopoly can earn positive pro t because of barriers to entry Social Costs of a Monopoly The monopoly is a pro t maximizer not a social maximizer Monopoly price is greater than the ef cient price Monopoly output is greater than the ef cient output The monopoly produces less at a higher price Monopolies cause dead weight loses Third degree price discrimination has to be able to split them up in different segments Things the government can do lncrease competition Can prevent mergers and break up companies Sometimes mergers are good synergy mergers joining Regulate them this usually happens with natural monopolies through price controls Price celling at the ef cient price Problem the cost structure of natural monopolies is unique Natural monopolies tend to have constance MC curve no diminishing marginal returns In this case p ef cient lead to pro t lt 0 The next best thing is to put a price selling is O Government can take over Government is a social maximize
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