Clicker Q: Monopoly firm faces demand curve that is downward sloping
- Because that’s the only firm
Monopolist, marginal revenue can be positive, zero and negative
- Marginal revenue is the extra money by selling product if want to sell more, have to lower the
o But if lower price, revenue will initially be positive
o But keep lower price, becomes Zero @ x intersection
o And negative below that.
Assuming monopoly firm does produce, profit-Maximizing Monopolist will choose level of output so
MC = MR
MC Pricing for Natural Monopoly. ATC determines total loss or profits that firm makes?
Ie Monopoly that government wants to regulate. Will charge us really high price. So gov can make firm
charge lower price lowers the deadweight loss
Slide 5: might be that profits that they get at regulated price is negative loss. Have to be above ATC to
make profits. But if regulated price is below, then profit would be negative
- Government can cover the loss through subsidies, but means don’t make profit. Also means have to
raise taxes on all consumers to help pay for losses
o Some consumers may say that they don’t use the resources that much
- Gov can increase regulated price to at least above ATC so make some profit but not THAT much
Price Discrimination: business practice of selling same good at different prices to different buyers
- Firm can increase profit by charging higher price to buyers with higher WTP
- Airline tickets: if buy in advance or even student discount, get lower price. But if want to leave
tomorrow, have to pay high price.
o They do this because it’s hard to identify people (business person or cheap student)
o Know that business person willing to pay high price because has to get to meeting
o But as student, know that they are much more price sensitive, so want to find lowest price
o Say 2000 of business traveller and 2000 students
o Air Canada has monopoly on direct route
o Demand curve could be stepwise, where the higher bit is business travellers
o If they only set one price, profits will be lower than if set two prices for the two groups
o If do one price, you set it above the lower group one. Set at the higher WTP.
- Air Canada does the two prices by say if student, show id card. Assume everyone else is business
- So monopolist is able to extract everyone’s consumer surplus as its own
o Perfectly price discrimi