ECON 3411 Lecture Notes - Lecture 38: Monopoly, Market Power, Marginal Cost

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Topic: multiplant output rule of output: let (cid:1844)((cid:1843)) be the marginal revenue of producing a total of (cid:1843) = (cid:1843)1 + (cid:1843)2 units, suppose the marginal cost of producing (cid:1843)1 units of output in plant 1 is. 1((cid:1843)1) and that of producing (cid:1843)2 units in plant 2 is 2((cid:1843)2): (cid:1844)((cid:1843)) = 1((cid:1843)1, (cid:1844)((cid:1843)) = 2((cid:1843)2, the profit-maximizing rule for the two-plant monopolist is to allocate output among the two plants such that: Implications of entry barriers: a monopolist may earn positive economic profits, which in the presence of barriers to entry prevents other firms from entering the market to reap a portion of those profits. Implication: monopoly profits will continue over time provided the monopoly maintains its market power: monopoly power, however, does not guarantee positive profits. None, unless the source of monopoly power is eliminated. Why government dislikes monopoly: p > mc too little output, at too high a price, deadweight loss of monopoly.

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