ECON 102 Chapter Notes - Chapter 21: Marginal Revenue, Marginal Cost, Perfect Competition

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Published on 20 Jan 2017
School
University of Illinois
Department
Economics
Course
ECON 102
Professor
Econ 102
Prelecture 21: Monopoly
(Note: prelectures 19 and 20 do not exist because it was just review for exam 2)
Market Structures
How many sellers exist in the market and how unique is the product?
Most competition <->no competition
o Perfectly competitive- many sellers selling a nearly identical product
Ex: tomato farmer in place with many tomato farmers
o Monopolistically competitive many sellers selling a product that is somewhat
different from one another
Ex: a Mexican restaurant owner. One of several Mexican restaurants. He
sells biggest burrito so he is able to differentiate product from competitors
o Oligopoly- few sellers selling a unique product
o Monopoly only seller selling the unique service
Ex; Chuck, a sole commercial airplane operator in small isolated town
Q1: Sean is a monopolist who operates a business rigging tablets to run twice as fast as the original
specifications. If Sean charges $40, he would have 10 customers, but if he lowers the price to $37, he
would have 11 customers. What is the marginal revenue of the 11th customer?
The answer is $7 because Marginal revenue is the change in total revenue from 10 customers ($400) to
11 customers ($407)
How a monopolist maximizes profits
Because Chuck, a sole commercial airplane operator in small isolated town, has no
competition, he has complete control of market price of air travel in his small tone
Reduced price increase in ticket sales
Monopoly maximizes profit by choosing an amount of profit in which marginal revenue
equals marginal cost (MR= MC)
o Since Chuck must reduce his price to sell more units, he has an incentive to sell a
smaller quantity than a perfective competitive company
Quantity
(# of
tickets)
Price
per
ticket
Revenue
(profit*quantity)
MR (revenue from
increasing sales by
additional unit)
MC (cost added
by producing
one more unit)
Profit
(revenue
costs)
1
$300
$300
$100
2
$275
$550
$250
$200
$150
3
$225
$675
$125
$200
$75
How much should Chuck sell each ticket at? ($275)
It costs Chuck $200 to fly each additional customer so marginal cost is $200
When he charges $300 for a ticket, one customer is willing to pay for a ticket. Profit is
price- cost
When he charges $275 for a ticket, 2 ppl are willing to pay for a ticket. The revenue is
$550 or $275*2. The marginal revenue is the additional revenue that will be generated by
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Document Summary

Prelecture 21: monopoly (note: prelectures 19 and 20 do not exist because it was just review for exam 2) Most competition <->no competition: perfectly competitive- many sellers selling a nearly identical product. Ex: tomato farmer in place with many tomato farmers: monopolistically competitive many sellers selling a product that is somewhat different from one another. He sells biggest burrito so he is able to differentiate product from competitors: oligopoly- few sellers selling a unique product, monopoly only seller selling the unique service. Ex; chuck, a sole commercial airplane operator in small isolated town. Q1: sean is a monopolist who operates a business rigging tablets to run twice as fast as the original specifications. If sean charges , he would have 10 customers, but if he lowers the price to , he would have 11 customers. The answer is because marginal revenue is the change in total revenue from 10 customers () to.

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