Monopoly Flashcards
(15 cards)
in the case of the monopolist, what is their revenue condition and why?
Revenue is p(y)*(y) – because price varies with output for the monopolist; higher prices = low output. The monopolist bases his decision on the demand curve.
Write the optimality condition for the Monopolist , explain any discrepancies
MR =MC ; p’(y) * y + p(y) =c’(y)
- When a monopolist faces a linear demand curve: MR will always lie below the demand curve.
- The key distinction of a monopolist is that he artificially reduces the output to raise prices. Where MR =MC will determine the optimal level of output to reduce and produce, and the price is derived from the demand curve. On a graph, this is significantly less output than that of eq’m quantity in the competitive market.
Solve example problem S898
and one from the PP
- for slides: solve for price and profit
Recipe 902
Explain the positive perspective of monopolies
From the research and development perspective: R&D requires substantial upfront costs, obtaining a loan requires proof of collateral. this means much R&D is financed out of existing profits, which suggests that companies with monopoly power can better address.
write the monopoly profits expression with respect to average costs
y(p(y)-AC(y)) = profits
depicted on graph 919
Write the monopoly’s optimality condition with respect to elasticity , and explain why the monopolist always produces where demand is elastic.
(can be derived from p(y) +p’(y) * y = MR )
MR= p(y)(1-1/E(y) ) = MC
if 1/E was between 1 and 0 ( >1) , the term in the brackets above would be negative; and then either P or MC would have to be negative to hold.
that is why the monopolists always produce where E >1 (elastic demand)
- if elasticity gets larger than price would have to get smaller in order to keep Mc(y) constant
Define Second Degree price discrimination
firm sells different units of output for different prices, but every individual who buys the same amount is paying the same price (buying in bulk)
Define First-degree price discrimination
a firm sells different units of output for different prices and these prices may differ from person to person. AKA perfect price discrimination
Define Third Degree Price Discrimination
Occurs when the firm sells output to different people at different prices, but every unit of output sold to a given “type” person sells for the same price (student discounts at the movie theater)
_____ is Key to Optimal Pricing in 3rd degree Price Discrimination problems :
Elasticity
Derive the expression for marginal revenue with respect to price elasticity of demand
should get p(y) [1-1/E]
Hints:
- remember the weird algebra
- remember to factor
-remember to the reciprocal rule.
Write the optimization condition for monopolist price discrimination problem
profits = R1(y1) + R2(y2) - c(y1+y2)
thus MR(y1) = MC(y1+y2)=MR(y2)
A good should bring the same increase in revenue whether it is sold in market1 or market 2
when you are given a monopoly’s inverse demand function, how would you calculate marginal revenue?
derive the expression for revenue
p(y) x y – plug in the inverse demand function for p(y) and multiply that equation by y. NOT the demand function times the inverse demand function.
Explain the intuition for taxing a monopolist and the outcome
Some might think that taxing the monopolist might decrease their market power as reflected by taxing in the competitive market. But in actuality taxing further reduces output, which raises the price consumers are subjected to.
Explain the optimality condition in price discrimination, and with respect to price elasticity of demand
MR1=MC(y1+y2)=MR2
That is, the marginal cost for producing an extra unit of output must be equal to the marginal revenue in each market.
since MR = p(y)[1-1/E] if one market has a higher price , it must have a lower price elasticity of demand.
