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ECON 201 - Midterm 2 to Final Review

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University of Waterloo
ECON 201
Kathleen Rybczynski

Monopoly Changes in Costs 1. Rise in FC → ATC increases, since there is no change in TR 2. Rise in VC → MC increases, monopoly fluctuations are smaller than PC fluctuations Maximum Price - Price will be lower, assuming PM> P 0 - Output would be higher without the price intervention - Economic profits will be lower, since X is the profit maximizing output 0 - If max price is set at the x-level where MC intersects demand, resulting M is max Price discrimination: the same good/service is sold at different prices to various buyers for reasons that arenʼt cost differences (requires prevention of resale) - Less elastic submarkets are charged a higher price by profit maximizing firms - For price discrimination to occur, price elasticity of D in submarkets must be different “Dose-by-dose” approach: selling a good one by one while progressively dropping prices, to extract ALL of the consumer surplus from a market - Also called ʻfirst degree pricing discriminationʼ Welfare Effects of a Pure Monopoly - Monopolies compared to perfect competition cause a DWL - Price discriminators versus a pure monopoly, transfers consumerʼs surplus to producer Monopolistic Competition - Similar to competitive competition, except there is price differentiation - No single equilibrium price, rather a cluster of prices reflecting consumer preferences Long Run Equilibrium of the Firm in Monopolistic Competition New Firms Entering the Industry - Demand (and MR) decrease, since part of the consumerʼs dollar goes to substitutes - Tangency solution = point where long run demand curve is tangent to ATC - Excess capacity = inefficiency measured between X andPX on tMe LRAC curve Oligopoly - Assumption #1: there are few sellers of the product - Assumption #2: there are significant barriers to entry into the indust
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