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Lecture 4

ECO349H5 Lecture 4: 4th class

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University of Toronto Mississauga
Michael H O

Monopoly Characters 1. One firm in the industry 2. No close substitute in the market 3. Monopolist is price maker ( in perfect competition, everyone is price taker) 4. Entry barrier: entry of new firm into the industry must be prevented *natural monopoly: an industry where economies of scale sufficiently large that only one firm can cover its costs while producing at its minimum efficient scale *crown corporation: in Canada, business concerns owned by the federal or provincial government Monopolist to maximize profit : MR = MC 1. Produce at MR=MC, Charge Pm 2. Consumer surplus 3. Producer surplus 4. Social efficiency loss P=12-Q, C=Q +4, calculate price, quantity, CS, PS and D.W.L in monopoly market. Regulate natural monopoly - set quota: need to information for each firm, and need to monitor and incentive firms to obey - subsidy: subsidy cost for the government, need to know marginal cost line - Marginal-cost pricing: set P=MC, it is allocatively efficient, but not profit-maximizing output for the firm If the natural monopoly with falling average costs, it will suffer losses - Average-cost pricing: set P=ATC (average total cost), it generates neither profits nor losses, but not allocative efficiency Price discrimination conditions 1. Market power 2. Identification of consumers’different valuations 3. No arbitrage 4. Types of price discrimination 1) Perfect price discrimination Charge different price at each output Charge each unit the maximum amount willing to pay Firm produces at MC=P No social efficiency loss * require to separate the market *product can not be resold Example: P=12-Q, C=Q +4, calculate the quantity, price, CS, PS and D.W.L 2) Two part-tariff 1. Charge the consumer entry fee ( which is consumer surplus) 2. Charge each unit at price of P 3. Produce at MC=P 4. No social efficiency loss Example: 2 P=12-Q, C=Q +4, calculate the quantity, price, and profit with two-part tariff? 3) Per-unit subsidy 2 P=12-Q, C=Q +4, then government implement a per-unit subsidy to eliminate social efficiency loss, calculate the subsidy, and CS, PS after implementing the subsidy 4) Ordinary price discrimination Means you can charge different prices in different markets Example: 2 P1=5-Q1, P2=7-Q2, C=Q +4 calculate the price and quantity in each market (1) ordinary price discrimination (2) No price discrimination 5) Tied sales Without bundling, Pc = 1500, Pm = 600, Profits = _____ With bundling, Pc+Pm = 2100m, Profits =_______ Cartels 1. Cartelizing a competitive industry 2. A cartel member’s incentive to cheat Four market structures 1. Perfect competition 2. Monopolistic competition - many small firms - differentiated products - some power to set prices - P>MC, Q less than perfect market 3. Oligopoly - few firms, usually large - differentiated products - price setters - usually P>MC, Q less than perfect market 4. monopoly Productive efficiency: For the firm: produce at lowest possible cost For the industry: marginal cost of production be the same for each firm →If the firms and industries are productively efficient, the economy will be on the production possibilities boundary. Allocative efficiency MC=P →It is only one point in the production possibilities boundary →occurs where the sum of consumer and producer surplus is maximized P
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