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L17 - Monopoly - 11062013.pdf

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University of Toronto St. George
James Pesando

Monopolist Perfectly Competitive Firm To sell an additional unit of output, monopolist must lower price Perfectly competitive firm can sell an additional unit of output at unchanged price What output (Q) maximizes monopolist’s profits? Answer: where MR = MC What price (P) will monopolist set? Answer: the demand curve identifies the price the monopolist must set to sell output Q Will the monopolist earn economic profits? Answer: if P > ATC, monopolist earns economic profits (if P < ATC, monopolist suffers economic loss and will eventually leave industry) Remember: because there are barriers to entry, monopolist may earn economic profits in the long run Profit Maximizing Output 1. Monopolist chooses profit-maximizing output (Qm) where MR = MC At Q1, MR > MC => expand output At Q2, MR < MC => contract output 2. To sell Qm, monopolist must charge price Pm Economic Profit of Monopolist P > ATC -> Profit P = ATC -> Zero Profit P < ATC -> Loss At Qm, P > ATC => Economic Profits The market for pubs is perfectly competitive and in long run equilibrium One pub owner buys all of the other pubs, and (thus) has a monopoly. What happens to: 1. The price of a pint of beer? 2. The level of profits? Digression Market SS = Sum of firms’ ss schedules = “ “ mc schedules = MC for industry as a whole = MC of monopolist What schedule must be added to show profit-maximizing output for the monopolist? Answer: the MR schedule A Perfectly Competitive Industry is Monopolized Results: 1. Price of beer increases ( and output of beer is reduced - “contrived scarcity”) 2. Monopolist earns economic profits (student exercise) Government Policy Towards New Drugs Objective
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