DOC PREVIEW
Berkeley ECON 100A - Section Notes 18

This preview shows page 1 out of 4 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 4 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 4 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

Section Notes 18, Econ 100A Spring ’06 1Section Notes 18Covering material from Lecture on March 16thClass Outline1. The Lerner Index2. Rent Seeking and Limiting Market Power3. Monopsony4. Practice Problems1 The Lerner IndexAs we saw in class, the Lerner Index is a measure of monopoly power given by:L =P − MCP,but what does this really mean? Let’s think about it more mathematically and what it implies graphically.-6-6Section Notes 18, Econ 100A Spring ’06 22 Rent Seeking and Limiting Market PowerIt is clear that Monopoly power leads to inefficient market outcomes (i.e. overall lower welfare in society),but are the only welfare losses captured by the market in that a monopolist sets a price higher than shecould in perfect competition? What are some ways that the government has stepped in to avoid this “socialloss” from monopoly power?3 MonopsonyA monopsony is almost exactly like a monopoly, except now there is a single buyer in the market insteadof a single seller. Therefore, the buyer recognizes that the price of the good is a function of how much theywant to buy. How do es this change our problem?-6Section Notes 18, Econ 100A Spring ’06 3Problem: (P&R, Chapter 10, Exercise 6)Suppose that an industry is characterized as follows:C = 100 + 2q2each firm’s total cost functionP = 90 − 2Q industry demand curvea. Is the is only one firm in the industry, find the monopoly price, quantity, and level of profit.b. Find the price, quantity, and level of profit if the industry is compe titive.c. Graphically illustrate the demand curve, marginal revenue curve, marginal cost curve, and average costcurve. Identify the difference between the profit level of the monopoly and the profit level of thecompetitive industry in two different ways. Verify that the two are numerically equivalent.Section Notes 18, Econ 100A Spring ’06 4Problem: (P&R, Chapter 10, Exercise 15)Dayna’s Doorstops, Inc. (DD), is a monopolist in the doorstop industry. Its cost is C = 100 − 5Q + Q2,and demand is P = 55 − 2Q.a. What price should DD set to maximize profit? What output does the firm produce? How much profitand consumer surplus does DD generate?b. What would output be if DD acted like a perfect comp e titor and s et MC= P ? What profit andconsumer surplus would then be generated?c. What is the deadwieght loss from monopoly power in part (a)?d. Suppose the government, concerned about the high price of doorstops, sets a maximum price at $27.How do es this affect price, quantity, consumer surplus, and DD’s profit? What is the resultingdeadweight loss?e. Now suppose the government sets the maximum price at $23. How does this decision affect price,quantity, consumer surplus, DD’s profit, and deadweight loss?f. Finally, consider a maximum price of $12. What will this do to quantity, consumer surplus, profit, anddeadweight


View Full Document

Berkeley ECON 100A - Section Notes 18

Documents in this Course
Pricing

Pricing

126 pages

Monopoly

Monopoly

33 pages

Pricing

Pricing

12 pages

Monopoly

Monopoly

20 pages

Load more
Download Section Notes 18
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Section Notes 18 and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Section Notes 18 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?