66 views2 pages
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
i Only one supplier. Entry to market is blocked.
i 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 - .02Q2
Marginal Revenue = dTR / dQ = 100 - .04Q (the rate at which total revenue is changing as output increases)
Assume total cost function of monopoly firm is:
TC = .01q2 + 10q + 432 or .01Q2 + 10Q + 432
So, MC = .02Q + 10 (the rate at which total cost is changing as output increases)
AC = .01Q + 10 + 432Q-1
We can solve by forming the profit function and maximizing with respect to Q
3 = TR – TC = (100Q - .02Q2) – (.01Q2 + 10Q + 432) = 90Q - .03Q2 – 432
Therefore, d3/dQ = 90 - .06Q
Setting = 0, we have .06Q = 90 or Q* = 1500
Substituting into the demand function, we have P* = 100 - .02(1500)= $70
Alternative (easier) solution method
We can set MC = MR and solve for Q
MC = .02Q + 10
MR = 100 - .04Q
.02Q + 10 = 100 - .04Q or .06Q = 90 or Q* = 1500
Substituting into the demand function, we have P* = 100 - .02(1500)= $70
How much is the profit of the monopolist?
Profit = TR – TC = (70 x 1500) – (0.01 x 1500 x 1500 + 10 x 1500 + 432) = $105000 - $37932 = $67068
Where is the monopolist’s supply curve?
www.notesolution.com
Unlock document

This preview shows half of the first page of the document.
Unlock all 2 pages and 3 million more documents.

Already have an account? Log in

Document Summary

What are the results: where does monopoly come from; what conditions are necessary; what are the public policy responses, excise tax on a monopoly. E single seller faces entire market demand curve (price maker, not price taker) 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. So, total revenue = tr = p x q = 100q - . 02q2. Marginal revenue = dtr / dq = 100 - . 04q (the rate at which total revenue is changing as output increases)

Get access

Grade+20% OFF
$8 USD/m$10 USD/m
Billed $96 USD annually
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
40 Verified Answers
Class+
$8 USD/m
Billed $96 USD annually
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
30 Verified Answers