Lecture notes week 8

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University of Toronto Scarborough
Economics for Management Studies
Gordon Cleveland

ECMA04H Week Eight The Monopoly Model a. The monopoly model. How does monopolist behave? What are the results? b. Inefficiency and monopoly. Dynamic efficiency vs. allocative efficiency. c. Where does monopoly come from; what conditions are necessary; what are the public policy responses? d. Excise tax on a monopoly E Only one supplier. Entry to market is blocked. E Single seller faces entire market demand curve (price maker, not price taker) What about Marginal Revenue (MR)? MR = dTR dq or dTR dQ TR = P x Q. To PC firm, P was a constant (price taker) To monopolist, P is a choice variable, so we must treat P as a function of Q So, MR = [(dP dQ) x Q] + [(dQ dQ) x P] or MR = P + Q (dP dQ) For a linear demand curve P = a b Q, MR = (a b Q) + (Q [-b]) = a 2 b Q So MR has the same intercept and twice the slope of the linear demand curve Algebraic example of monopoly industry Market Demand: P = 100 - .02Q So, total revenue = TR = P x Q = 100Q - .02Q 2 Marginal Revenue = dTR dQ =
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