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Chapter 10

Chapter 10 Monopoly, Cartels, and Price Discrimination.docx

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Lee Bailey

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3.3 Chapter 10 Monopoly, Cartels, and Price Discrimination (pg. 226) 10. 1 Revenue Concepts for a Monopolist  The shape of a firm’s SR cost curve arises from the conditions of production rather than from the market structure in which the firm operates. As a result, the same forces that lead perfectly competitive firms to have U-shaped cost curves apply equally to monopolists. (Everything we saw in Chapter 7 applies to all market structures.)  Monopolists face a negatively sloped demand curve.  When the monopolist charges the same price for all units sold, its total revenue (TR) is simply equal to the single price times the quantity sold: TR = p x Q.  AR = TR/Q = p x Q/Q = p  Since DD shows the price of the product, the DD is also the monopolist’s AR curve. Marginal Revenue A monopolist’s marginal revenue is less than the price at which it sells its output. Thus the monopolist’s MR curve is below its demand curve.  A monopolist’s choice of output is MC = MR.  A monopolist does not have a supply curve because it is not a price taker; it chooses its profit- maximizing price-quantity combination from among the possible combinations on the market demand curve.  A monopolist has a marginal cost curve, but does not face a given market price. The monopolist chooses the price-quantity combination on the market demand curve that maximizes its profits. Firm and Industry  The monopolist is the industry. Thus, the short-run, profit-maximizing position of the firm is also the short-run equilibrium of the industry.  A perfectly competitive industry produces a level of output such that price equals marginal cost. A monopolist produces a lower level of output, with price exceeding marginal cost.  Since price exceeds marginal cost for a monopolist, society as a whole would benefit if more units of the good were produced – because the marginal value to society of extra units, as reflected by the price, exceeds the
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