Chap 2 Lecture Notes
Monopoly and Profit Maximization
• The monopolist maximizes profit by equating marginal revenue with marginal cost • This is a two-stage process
$/unit
Stage 1: Choose output where MR = MC
PM Profit ACM MR QM QC
This gives output QM Output by the monopolist isStage 2: Identify the market clearing price less MC than the perfectly gives price PM This competitive output QC AC MR is less than price Price is greater than MC: loss of efficiency Price is greater than average cost Demand Positive economic profit Long-run equilibrium: no entry
1
Quantity
Chapter 2: Basic Microeconomic Tools
Efficiency and surplus: illustration
$/unit The demand curve measures the willingness to pay for each unit Consumer surplus is the area between the demand curve and the equilibrium price Competitive Supply
The supply curve measures the marginal cost of each unit Producer surplus is the area between the supply curve and the equilibrium price
PC
Consumer surplus Producer surplus
Equilibrium occurs where supply equals demand: price PC quantity QC
Demand
Aggregate surplus is the sum of consumer surplus and producer surplus The competitive equilibrium is efficient
Chapter 2: Basic Microeconomic Tools
QC
Quantity
2
Problem 2 Monopoly
• Now suppose that the manufacturing of cellular phone, as described in problem 1, in now monopolized. The monopolist has 50 identical plants to run. Each plant has the same cost function as described in problem 1. The overall marginal cost function for the multiplant monopolist is described by MC(Q) = 10 +Q/25. The market demand function is assumed to be the same as in problem 1. Recall QD = (6000-50P)/9.
Industrial Organization: Chapter 1 3
Problem 2 Monopoly (continued)
• Show that the monopolist’s marginal revenue function is MR(Q)=120-18Q/50. • Show that the monopolist’s profit-maximizing output level is QM=275. What price does the monopolist set to sell this output level of output? • What is the
• The monopolist maximizes profit by equating marginal revenue with marginal cost • This is a two-stage process
$/unit
Stage 1: Choose output where MR = MC
PM Profit ACM MR QM QC
This gives output QM Output by the monopolist isStage 2: Identify the market clearing price less MC than the perfectly gives price PM This competitive output QC AC MR is less than price Price is greater than MC: loss of efficiency Price is greater than average cost Demand Positive economic profit Long-run equilibrium: no entry
1
Quantity
Chapter 2: Basic Microeconomic Tools
Efficiency and surplus: illustration
$/unit The demand curve measures the willingness to pay for each unit Consumer surplus is the area between the demand curve and the equilibrium price Competitive Supply
The supply curve measures the marginal cost of each unit Producer surplus is the area between the supply curve and the equilibrium price
PC
Consumer surplus Producer surplus
Equilibrium occurs where supply equals demand: price PC quantity QC
Demand
Aggregate surplus is the sum of consumer surplus and producer surplus The competitive equilibrium is efficient
Chapter 2: Basic Microeconomic Tools
QC
Quantity
2
Problem 2 Monopoly
• Now suppose that the manufacturing of cellular phone, as described in problem 1, in now monopolized. The monopolist has 50 identical plants to run. Each plant has the same cost function as described in problem 1. The overall marginal cost function for the multiplant monopolist is described by MC(Q) = 10 +Q/25. The market demand function is assumed to be the same as in problem 1. Recall QD = (6000-50P)/9.
Industrial Organization: Chapter 1 3
Problem 2 Monopoly (continued)
• Show that the monopolist’s marginal revenue function is MR(Q)=120-18Q/50. • Show that the monopolist’s profit-maximizing output level is QM=275. What price does the monopolist set to sell this output level of output? • What is the