ECON 101 Lecture Notes - Lecture 17: Demand Curve, Market Power, Natural Monopoly

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Monopoly outcomes: production decision, profits, barriers to entry, regulation. Monopolist"s production decision: profit maximizing condition (will produce until this point): mr = mc, at 8 units of output charge at pm. Earns profit in short run (can"t keep firms out in lr) Earns profit in both short and long run. Tr - tc = (pm*qm)-(atcm*qm) = (pm-atcm)*qm: monopolist can charge higher price than perfectly competitive firm. Monopolist shutdown decision: shutdown if, short run: p < avc, long-run: p < atc. Welfare effects: monopolist p > mc, monopolist production: output lower level than efficient (perfectly competitive output level, monopolist cause dwl to society. Why monopolies exist: they have market power, charges higher price than perf. Comp outcome: create dwl, create econ profit for the firm. In order for profits to persist in the long-run, some barrier to entry must be in place: otherwise, other firms will enter.

Related Questions

The demand function is Q = 100 - .5P. The cost function is TC = C = 100 + 60(Q) + (Q) ²

a. Find MR and MC

b. Demonstrate that profit is maximized at the quantity where MR = MC.

c. Derive the relationship between marginal revenue and the price elasticity of demand and show that the profit-maximizing price and quantity will never be the unit-elastic point on the demand curve.

d. Using the information in (b), demonstrate that the profit-maximizing price and quantity will never be in the inelastic portion of the demand curve.

champagnemallard721

interval (or arc) elasticity

cross-price elasticity

price elasticity of demand

elastic demand

income elasticity

inelastic demand

inframarginal units

marginal revenue

point elasticity

price effect

quantity effect

total revenue

unitary elastic demand

1. __________________ A measure of consumersâ sensitivity or responsiveness to changes in the price of a good or service.

2. ___________________ When the percentage change in price (in absolute value) is more than the percentage change in quantity demanded (in absolute value).

3. ___________________ When the percentage change in quantity demanded (in absolute value) is more than the percentage change in price (in absolute value).

4. ___________________ When the percentage change in quantity demanded (in absolute value) is just equal to the percentage change in price (in absolute value).

5. ___________________ Total amount paid to a producer for a good or service P * Q.

6. ___________________ The effect on total revenue of a change in price, holding quantity constant.

7. ___________________ The effect on total revenue of a change in quantity, holding price constant.

8. ___________________ An elasticity calculated over an interval of a demand curve or demand schedule.

9. ___________________ Elasticity at a specific price or point on a demand curve.

10. ___________________ A measure of how responsive quantity demanded is to a change in income, all other things constant.

11. ___________________ A measure showing how responsive the quantity demanded of one good is to changes in the price of another good, other factors constant.

12. ___________________ The additional revenue received by producing and selling one more unit of output.

13. ___________________ Units of output that could have been sold at a higher price had the firm not lowered its price to sell additional (marginal) units.

coffeehornet269

Suppose that a firm faces the demand curve, P = 100 - 3Q, where P denotes price in dollars and Q denotes total unit sales. The cost equation is TC = 200 + 22Q.

A. Determine the firmâs profit-maximizing output and price.

B. Suppose that there is a change in the production process so that the cost equation becomes TC = 80 + 12Q + Q2. Determine the resulting effect on the firmâs output and price.

C. Compared to the two different cost structures in part a and b, what has happened to the Total cost and Marginal cost at the original quantity found in part a? Also, comment on your findings here as it relates to the quantity values computed in parts a and b.

D. Suppose that the firm sells in a competitive market and faces the fixed price: P = $48. State the Total Revenue (TR) and Marginal Revenue (MR) functions, and using the cost function in part b, find the firmâs new optimal quantity.

ECON 101 Lecture Notes - Lecture 17: Demand Curve, Market Power, Natural Monopoly

ECON 101 Full Course Notes

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