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Chapter 11

ECON 230D2 Chapter 11: Notes


Department
Economics
Course Code
ECON 230D2
Professor
idk
Chapter
11

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Chapter 11
Monopoly
o Occurs when there is only one firm dominating the market
o Other firms cannot enter
o Price setter
MR and price
o R = p*q
o MR = R’
MR and price elasticity of demand
o MR =  
o E = 

o Inelastic -1 < e <0
o Elastic e < -1
o Perfectly elastic e = -inf
o Perfectly inelastic e = 0
Price maximization
o
o Shutdown decision
o A monopoly shuts down to avoid making a loss in the short run if its price
is below its average variable cost at its profit maximizing quantity
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o In a long run, the monopoly shuts down if the price is less than its average
cost
Mathematical approach
o Profit maximizing point
o MR = MC
Effects of a shift of the demand curve
o
Market power
o the ability to a firm to charge a price above marginal cost and earn positive profit
Lerner index
o The ratio of the difference between price and marginal cost to the price:
(P-MC)/p
o if the firm is maximizing its profit, we can express the Lerner Index in terms of the
elasticity of demand by rearranging previous equation
o 
  
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