ECON 302 Study Guide - Final Guide: Marginal Cost, Monopoly Profit, Externality
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3 Jun 2013
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Type a values each of the first 4 units at more than the cost, so they should consume at least 4. After that, the benefit is nil, while the cost is positive, so the quantity should be exactly 4. Similarly, type b"s quantity should be exactly 5. In the first best, the monopoly chooses the efficient allocation to maximize the surplus because it can take all the surplus. Thus it makes 4*(4-1) = 12 from type a and 5*(5-1) = Ir means individual rationality , and ic means incentive compatibility. Because , and together imply , which can be eliminated. This means that must be binding, because otherwise the firm can raise . Therefore, , which implies as long as because increases with . This in turn implies that must bind because otherwise the firm can raise . The firm"s maximization problem becomes: or subject to .
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