Monopoly Flashcards
What is a Pure Monopoly
Single Seller
What is the Slope of the Demand Curve in a Monopoly Market?
Downward Sloping
How can Monopolist alter Price?
Adjust Output levels–> Alter Price
What are the 2 effects on Revenue if Output Increases by ∆y?
Increased y –> Decreased P
- Sells More Output - Increased Revenues of p∆y
- Decreased P by ∆p - Receives Lower Price on All Output- Including All previous units
What is the TE on Revenue of Increased Output by ∆y?
∆TR = p∆y + y∆p
What is MR?
MR = ∆TR / ∆y = p + (∆p/∆y)y
How much Steeper is MR than Inverse Demand Curve?
2x as steep as Inverse Demand
Define Marginal Cost
Change in TC as Output Increases
- Slope of TC curve
MC(y) = dc(y) / dy
Where is Profit Maximised?
MR = MC
What does it mean if Own-price Elasticity becomes Less Negative?
Market Demand becomes Less Sensitive to Price Change
- More Inelastic
If Monopolist Decreases Price- what must it take into account?
Effect of Price Reduction on All Units it sells
Derive MR in terms of Elasticity
MR = p + (∆p/∆y)y => MR = p + (∆p/∆y) (y) (p/p) -Multiply by p/p ==> MR = p + (∆p/∆y) (y/p) (p) - (∆p/∆y) (y/p) = 1/⍷d MR = p[1 + 1/⍷d] MR(y) = p(y) [1 + 1/⍷(y)]
What part of Demand Curve does Monopolist ALWAYS Operate on?
Elastic part of Demand Curve
Given MR, Suppose MC = £k/Output unit, what is Profit Max?
MR = MC p(y*) [1 + 1/⍷] = k => p(y*) = k / [1 + 1/⍷] ==> p(y*) = MC / [1 + 1/⍷] As ⍷ Rises to –1 - Monopolist Alters Output to Increase Price
Where is the Output Level for a Profit Max Monopolist?
Market demand = Own-Price Elasticity - ALWAYS
Why does Monopolist choose Output level where Market demand = Own-Price Elasticity?
If: p(y) [1 + 1/⍷] = k
–> p(y) [1 + 1/⍷] > 0
=> 1 + 1/⍷ > 0
==> 1/⍷ > -1 ==> ⍷ < -1
How is Monopolist affected by a Quantity Tax?
Q.T of £t / Output unit
=> Increased MC by £t - Shifts Up
How does Tax affect Output level?
Decreases Profit Max. Output Level
–> Increases Market Price + Decreases Input Demands
Q.T is Distortionary
What are the Equilibrium effects of a Q.T?
Decreased Output Level
Increased Output Price
Decreased Demand for Inputs
What is Proportion of Tax paid by Consumer?
p(yt) = (k + t)⍷ / 1 + ⍷
Tax Paid by Consumer = p(yt) - p(y*) = [(k + t)⍷ / 1 + ⍷] - [(k)⍷ / (1 + ⍷)]
==> t⍷ / 1 + ⍷
Since ⍷ < -1 => (⍷ / 1 +⍷) > 1 –> Monopolist passes on More than Tax
What does a Monopolist cause the Market to become?
Pareto Inefficient
Decreased CS + PS
DWL
