Intermed Micro Theory
Intermed Micro Theory ECN 100
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This 4 page Class Notes was uploaded by Madie Schinner on Tuesday September 8, 2015. The Class Notes belongs to ECN 100 at University of California - Davis taught by Staff in Fall. Since its upload, it has received 25 views. For similar materials see /class/191887/ecn-100-university-of-california-davis in Economcs at University of California - Davis.
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Date Created: 09/08/15
University of CaliforniaDavis TA Jason Lee Econ looIntermediate Micro Emailjawleeucdavisedu Handout 8 I Monopohes Firms are said to be monopolies if they have the following characteristics 1 The firm is the only seller in the industry 2 The product is unique 3 Entry into the industry is blocked Why would the entry into the industry be blocked 1 Government blocks entry via patent rights or franchises 2 One firm controls the key raw material not common 3 Network externalities you need a lot of users before it becomes valuable thus it is hard to start 4 Natural monopolies economies of scale are so large that there is room only for 1 firm Decision Process for a Monopolist One key difference between a monopolist and a perfectly competitive firm is that there is no difference between the monopolist and the industry The monopolist is the industry Thus the industry demand curve also happens to be the demand curve for the monopolist One key similarity between a monopolist and a perfectly competitive firm is that the monopolist will maximize profits where MR MC However MR P as it did under perfect competition In fact the MR curve will always be below the demand curve Example Suppose that Kiev Plutonium Factory is a monopolist in the production of Polonium 210 a radioactive substance used to assassinate spies It faces the following demand schedule Price Quantity 60 0 57 1 54 2 51 3 48 4 45 5 42 6 Now using definitions learned in previous chapters calculate the total revenue and marginal revenue at each quantity Price Quantity Total Revenue Marginal Revenue 60 0 NA 57 1 57 57 54 2 108 51 51 3 153 45 48 4 192 39 45 5 225 33 42 6 252 27 Plot the demand curve and the MR curve to see that the MR curve is always below the demand curve for a monopolist Demand and MR 60 50 40 30 20 10 0 Demand Price I MR 0 5 10 Output The reason why the MR curve is below the demand curve is that in order to increase sales the monopolist must lower price on all units since it faces a downward sloping demand curve There are two effects when a monopolist cuts prices 1 The firm gains revenue because it can sell more units output expansion effect 2 The firm loses revenue because the firm must lower the price for units it could have sold at a higher price price reduction effect Adding the two effects together results in the derivation of the marginal revenue curve AP MR P 7Q AQ See Page 628 in text for derivation of the marginal revenue curve Doing some easy manipulation we can rewrite the MR curve in terms of elasticity of demand 1 MR Pl 7 Ea Monopolies generally have market power That is to say that a monopolistic firm is able to charge a price that is above the marginal cost The markup measures the degree to which a monopolist can set the price above MC Formally we define markup P MC 1 P 7 See text for derivation Ea gure 1 39 39 39 39 39 and price of Figure 1 Mk Q m r produce at Q At Qt the price that is charged is found by looking at the demand curve Thus the monopolist will charge P and supply Q units ofthe good um we quot 39 39 let s introduce our cost curves just the ATC mum to see how much pro t a monopolist will make Figure 2 AW This graph is the same as the one above with the only addition being the ATC curve We know that the r 39 39 r quot quotquot 39 39 P andQ Whereisthe pro t We know that total revenue is P x Q What is total cost Total cost will be Q x ATC by de nition r quotquot quot quot quot t t st39 39 39 39 the graph above Note that unlike perfectly competitive rm a monopolist will keep this pro t even in the long run Practice Problems 1 Answer the question based on the accompanying graph for a monopolist a lfthis firm is a profitmaximizer how much output will it produce b At What price will the firm sell its output c How much profit or loss will this firm realize 2 Suppose that the demand curve for Microsoft Vista Operating System is Qd 16000 7 20013 Let MC 20 00025Q vc 20Q 000125Q2 FC 48000 a What is the profitmaximizing sales quantity and price b How much profit or loss will Mcrosoft realize c What is the markup