Lesson 2.2 Flashcards
what price and output level does monopolist choose?
one that results in largest difference between TR and TC, where MR = MC where MR = P(1+1/n)
is P > MR or P < MR, in monopoly and what does MR depend on
P > MR, depends on Q, unlike perfect competition
where will a monopolist produce?
where MR is positive, where |n| > 1, where demand is elastic
what is market demand of a monopolist?
firm demand = market demand
where should a monopolist shut down?
if Price < AVC
define cost plus pricing
simplistic strategy of setting price that guarantees that price is higher than estimated average cost
does cost plus pricing optimize profits, in monopoly
not guaranteed
formula for markup, in monopoly
price - cost / cost = profit margin / cost (cost is individual cost)
formula for price with cost plus pricing, in monopoly
price = cost (1 + markup)
define target return, in monopoly
what managers hope to earn and what determines the markup
4 potential flaws of cost plus pricing, in monopoly
1) does not consider how much demand there is for the product
2) does not consider the own price elasticity of demand of the product
3) ignores pricing behaviour or rival product sellers
4) looks at average and not marginal cost
relationship between price elasticity of demand and optimal markup, in monopoly
the smaller in absolute terms the price elasticity of demand, the larger the optimal markup. the less sensitive demand is to change in price, the higher price you should charge
if a company sells product x and y, what is TR. in monopoly
TR_x + TR_Y
if a company sells product x and y, what is MR of x? in monopoly
dTR_x/dQx + dTRy/dQx
what is the demand interrelationships of products?in monopoly
dTRy / dQx or dTRx/dQy (last term in MR x and y equation)
explain demand interrelationship in monopoly
effect of an increase of quantity x sold on the TR from product Y with MRx or vice versa
demand interrelationship for complement goods in monopoly
effect is positive - increase in quantity of one sold on the total revenue of the other will be positive
demand interrelationship for substitute goods in monopoly
effect is negative - increase quantity of one sold on the total revenue of the other will be negative
what happens with joint products produced in fixed proportions in monopoly
if MR obtained from each product > MC, should expand output; optimal production where total MR = MC; surplus of quantity should be avoided (total Mr < MC); total MR is the vertical summation of MR curve of individual products; where MR of both products is positive at optimal level of output
define isocost curve
curve showing amounts of goods produced at the same total cost
define isorevenue line
lines showing the combinations of outputs of products that yield the same total revenue
for monopoly firms that produce joint products in variable productions, where is optimal production?
where isorevenue line is tangent to isocost curve and where profit level is highest
what is a monopsony
industry with one buyer
in a monpsony, who controls the price?
the buyer
demand for labour of a monopsony
marginal benefit of hiring an additional worker
marginal benefit of hiring an additional worker = demand for labour of a monopsony formula
MR * MP of labour
labour supply curve of a monopsony
upward sloping line; P = c + eQ, P is wage rate, Q is # of workers willing to work at that wage
total expenditure of labour on a monopsony
C = PQ = cQ +eQ^2
marginal expenditure/marginal cost of a monopsony
dc / dQ = c + 2eQ
how will monopsonist maximize profit?
where marginal benefit of hiring another worker = marginal expenditure of hiring another worker
in a monopolistic competition, what type of products does the firm sell and define it
product group - similar but not identical products ex. toothbrushes
5 conditions for an industry to be in monopolistic competition
1) product differentiation
2) product groups are produced by many firms
3) # of firms must be large enough so that each firm expects its actions will be unheeded by rival firms and unimpeded by retaliation
4) entry into the product group industry must be relatively easy
5) no collusion (price fixing) takes place within the product group
demand curves of monopolistic competition?
downward sloping demand curve - if it raises price, it will lose customer to other firms, if it lowers price, it will gain some customers from competitors
short run equilibrium for monopolistic competition:
set Q and go above through MC = MR to hit demand curve ; P > AVC for profit to be maximized; identical to monopoly
long run equilibrium for monopolistic competition firms
economic profit is 0; each firm maximizes profit in long run; where Q goes up through intersection of MC and MR to hit where demand and long run average cost intersect; entry and exit of firms from the product group shifts individual firms demand curves
what does advertising expenditures exhibit?
diminishing marginal returns
gross profit formula for monopolistic competition
P - MC
how to maximize net profit with advertising expenditures for monopolistic competition
set advertising expenditures at level where extra dollar of advertising results in more than a dollar of increase in gross profit, where change in Q(P - MC) = 1 OR where P*change in Q = P / (P - MR) OR where marginal revenue from an extra dollar of advertising = |n|
target return price
P = L + M + K + (F/Q) + (piA/Q) where L = unit labour cost, M = unit material cost, K = unit marketing cost, F = total fixed cost, Q = quantity, pi = desired profit rate, A = total gross operating assets (L, M, K can be AVC)
if demand for product A > product B for optimal pricing for joint products produced in fixed proportions,
you should sell B until MR B = 0 if MR A > MC
draw CS, PS and social welfare in a monpoly
draw demand, MC and MR, Q is through Mc and MR to demand curve and across for P; CS is triangle above Price; PS is below CS to MC curve
draw CS, PS and social welfare in perfect competiton
draw demand and MC curve, CS is point above halfway of the triangle, PS is below halfway of the triangle
isorevenue slope
-Px/Py
isocost slope
dY/dX
what should optimal markup be?
1/(|n|-1)
define total marginal revenue curve
vertical summation of the 2 marginal revenue curves for individuals products
If elasticity of demand is –2, marginal cost is $4, and average cost is $6, a profit-maximizing markup price is:
ignore markup, it’s just MC = P(1+1/n) = 8
If John produces joint products A and B and refuses to sell all the A he produces, then:
A is a low-demand good
When a producer of joint goods refuses to sell all of one good, the producer:
must destroy some of the low-demand good
A producer refuses to sell some of one joint product. MRA is the marginal
revenue for a low-demand good. If the producer were to sell all its production, what would be true of MRA?
MRA < 0
Jack O. Trades produces joint products A and B with linear demands DA > DB. Given MRB is marginal revenue for B and MCB is marginal cost of B, Jack’s total marginal revenue curve changes slope at the quantity where
MR B = 0
For a producer of joint products X and Y with total costs CX and CY, an isocost curve:, and explain isorevenue line too
shows points where Cx + Cy is constant (same with isorevenue line except for Rx + Ry)
how to solve for optimal wage rate and quantity of labour in a monopsony where supply curve is w = 40+2L and demand curve is w = 200-L
1) find total expenditure/total cost which is L*supply curve
2) find MC = dTotal cost / dL
3) equate MC = demand curve
4) find L
5) substitute L in supply curve
The ABC Company estimates that a newspaper advertising campaign would cost $25,000 and would generate $35,000 in new revenues. The firm should begin this campaign as long as:
1) find MR of advertisting = Revenues/cost
2) absolute price elasticity of demand < MR of advertisting
why do firms advertise?
to build brand loyalty
why do firms offer promotions
to appeal to price sensitivity
