# ECO206Y1 Study Guide - Midterm Guide: Deadweight Loss, Price Discrimination, Marginal Revenue

by OC32723

Department

EconomicsCourse Code

ECO206Y1Professor

allStudy Guide

MidtermThis

**preview**shows pages 1-3. to view the full**12 pages of the document.**ECO206 – Microeconomic Theory

1. Midterm III Structure

Based on analysis of past midterms, there are four main topics that are covered in the third midterm of

ECO206: Monopoly, Price Discrimination, Game Theory and Strategic Thinking and Oligopoly. The

midterm is usually about 2 hours long and consists of 3 to 5 questions with 3 to 5 sub-questions per

question. The total number of questions, including sub-questions, is roughly 12 to 15.

2. Midterm II Statistics

2012

2013

Monopoly

3

4

Price

Discrimination

1

1

Game Theory and

Strategic Thinking

5

4

Oligopoly

4

3

Total

13

12

Figure 1 - Midterm III Statistics

Monopoly

28%

Price

Discrimination

8%

Game Theory and

Strategic Thinking

36%

Oligopoly

28%

Midterm III Questions - Statistics

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Topic 1: Monopoly

Knowledge Summary:

Monopoly is a market structure that is defined by one seller/producer in a market

Can make decisions over how much to produce or what price to charge

The industry’s market demand curve is the same as the monopolist’s demand curve

(unlike perfect competition – firm’s demand curve is perfectly elastic and industry’s

demand curve is downward sloping)

The marginal revenue of a monopolist is not equal to the price it charges because in order

to sell more output, the monopolist has to lower its prices

Monopolists are price makers whereas perfectly competitive firms are price takers

(understanding the differences between perfect competition and monopoly will help in

understanding the main fundamentals of monopoly structure).

The marginal revenue curve of a monopolist has the same intercept as the monopolist’s

demand curve, but twice the slope.

Price elasticity of demand is

greatly related to marginal revenue of

a monopolist and what prices it should

charge. If a monopolist finds itself on

an inelastic portion of the demand

curve, it can increase profits by raising

prices and lowering quantity. If it

finds itself on the elastic portion of the

demand curve it can increase profits

by lowering prices and decreasing

quantity

Keep in mind that the goal of a

monopolist, for our purposes, is to

maximize profit.

On a linear demand curve, consumer spending and thus monopolist revenue is maximized

when the price elasticity of a good is equal to -1 (i.e. it is unitary elastic). This is the point

where marginal revenue is equal to 0 (i.e. where total revenue is maximized, since marginal

revenue is the first derivative of the total revenue curve). But, recall the objective of a

monopolist is to profit maximize not revenue maximize. So it will not choose to operate

where MR=0 but instead where MR=MC (at yellow star). At this point monopolist is

producing restricted output at a higher price creates a deadweight loss. The only time

MR=0 is a profit maximizing point is if MC=0 where MC is marginal cost. Fixed costs must

be accounted for in the case where MC = 0. Examples from past tests on the next page will

elaborate on this.

At red star: MR =0, revenue is maximized at

this point and PED=-1

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Why is MC=MR the profit maximizing quantity? Because we know that: Profit = Total

Revenue – Total Cost. Suppose this expression is a function of quantity (x). The first

derivatives of the RHS will be MR and MC respectively. Setting it equal to 0 we have:

MC=MR.

Useful formula for MR: MR = P(1 +

) where P(x) is price as a function of quantity,

and PED is price elasticity of demand.

Can also use: MR = price + (change in price)x(quantity sold at old price)

Using the first formula and letting x=1, we can say:

Rearranging we get:

, where PED is a negative number. P – MC is known as the monopoly mark up, or

how much the monopolist marks up in price above the perfectly competitive price level (which is

P=MC)

And

is the monopoly mark up ratio (or the Lerner’s index).

Summary of Questions to be Asked:

What is the profit maximizing level of output and price level?

Calculating fixed costs under positive profit levels

Illustrating monopoly profits and profit maximizing output and price level

Demand under different pricing policies (form of price discrimination, will be covered in

Topic 2 but intertwined with monopolies)

To calculate the Lerner index/ mark up ratio

Related Past Test Questions:

2013 Midterm III Question 2

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