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Chapter 13 Homework
Chapter 13 Monopoly 1 Monopoly  A monopolist is a firm that is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a monopoly.  Krugman references De Beers (diamonds) as an example 2 Monopoly  Market power is the ability of a firm to raise prices.  The monopolist (individual) supply curve is the industry supply curve  The monopolist exists because of barriers to entry 3 Monopoly 4 Monopoly  Monopolies exist because of barriers to entry  1. Control of a scarce resource or input  2. Increasing returns to scale  Average cost falls as output increases due to high fixed cost, leads to natural monopoly  3. Technological superiority  4. Network externality  5. Government created barrier  Patent & Copyright 5 Monopoly 6 Monopoly  Monopoly Profit Maximization:  Recall for the perfectly competitive firm MR=MC was the rule  And MR=P  P=MC  This holds for the monopolist, except MR ≠ P like it did for the perfectly competitive firm 7 Monopoly The demand curve faced by monopolists is the industry demand curve 8 Monopoly  When monopolists increase output  Market price falls  Transacted quantity increases  More quantity is sold, increasing total revenue (called the quantity effect)  Less price per unit is achieved, decreasing total revenue (called the price effect) 9 Monopoly 10 Monopoly 11 Monopoly 12 Monopoly  Graphically, to find profit maximizing price & quantity for a monopolist:  Find the quantity where MC=MR  From that quantity, read the price from the demand curve  *note that in the following graph, MC is assumed to be constant and there is no fixed cost, therefore MC=ATC 13 Monopoly 14 Monopoly  Monopolists tend to (in relation to perfect competitors)  Produce a smaller output  Charge a higher price  Earn an economic profit (in short and long run) 15 Monopoly  The following slides are a graphical comparison of perfect competition to monopoly, without numbers  Recall: 16 Monopoly 17 Figure 13.6 18 Solution to #2 19 Monopoly & Inefficiency 20 Monopoly  Preventing Monopoly  Natural monopolies are generally allowed to exist because they achieve low cost  Other monopolies are broken up (in the USA) through antitrust policy  Dealing with Natural Monopoly  Public ownership  Regulation – price ceiling 21 Unregulated v. Regulated 22 Price Discrimination  When a firm charges different prices to different consumers for the same good  Consider an airline that faces demand such that:  2000 business flyers won’t pay over \$550 to fly  2000 student flyers won’t pay over \$150 to fly  MC = \$125, no fixed cost 23 Price Discrimination  If the airline charges \$550, profit is \$850,000  If the airline charges \$150, profit is \$100,000  If the airline charges \$550 to business flyers and \$150 to student flyers, profit is \$900,000  If a firm perfectly price discriminates, it converts all consumer surplus to profit 24 Price Discrimination 25 Price Discrimination 26 Price Discrimination 27 Price Discrimination 28 Price Discrimination  Ways that a firm can engage in price discrimination  Advance purchase restrictions  Volume discounts  Two-part tariffs (like Sam’s Club) 29

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DrGates
School: UT Austin

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