Econ 201 1st Edition Lecture 40Outline of Last Lecture 1.Revenue Concepts for Monopoly 2.Marginal Revenue and Linear DemandOutline of Current Lecture 1.Analysis of MR ~ Quantity Effect & Price Effect2.Steps to Analyze Market Outcomes under Monopoly3.Policies for MonopolyCurrent LectureAnalysis of MR ~ Quantity Effect & Price Effect• If a monopolist increases Q, TR is affected two ways.– Quantity Effect: ΔQ×P2Price Effect: ΔP×Q1• Demand: P = 100 – 1Q Consider two points on D. – Q1 = 20 èP1 = 80 and TR = 1600– Q2 = 22 èP2 = 78 and TR = 1716 è ΔTR = 116– Quantity Effect: 2×78 = 156 Price Effect: – 2×20 = – 40Steps to Analyze Market Outcomes under Monopoly• Find output choice where MR = MC èQM. • Use Demand relationship to find Price èPM.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.• Evaluate profit using Price and Average Cost: Π = (P – AC) x Q .• Evaluate efficiency through surplus concepts: TS = CS + PS• Deadweight Loss: – Difference between TS under full efficiency and TS under monopoly (i.e. competitive equilibrium v. monopolized market)– DwL= TSComp – TSMonopPolicies for Monopoly• Economists emphasize concern for efficiency: focus on DwL.– Distributional issues may also drive policy ~ the equity issue.– i.e. Monopoly profit may be perceived as unfair.Four Broad Options• 1. Structural Remedy ~ forced breakup; disallow mergers.• 2. Oversight Remedy ~ Public supervision of behavior.– Disallow predatory practices; Regulation of prices. – Price regulation common in utilities: Solution to Natural Monopoly.• 3. Government ownership ~ Profit is no longer firm’s objective.– Managers directed to serve citizens, not maximize profit.• 4. Do nothing ~ Viable policy in particular circumstances: – Demand highly elastic because substitutes are available.Market is contestable. Threat of entry limits Monopolist’s
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