week 5 perfect comp/ monopoly

Question 1

profit

Answer 1

total revenue (pricexquantity) - total cost

Question 2

Shut down condition

Answer 2

Higher profits will be achieved by shutting down rather than producing an output greater than 0 if the price is less than the average variable cost as each unit produced increases losses.

Question 3

producer surplus

Answer 3

Producer surplus is the profits + the fixed costs

Question 4

Perfect competition

Answer 4

many firms in the market due to low barriers to entry, the firms are price takers as they sell homogeneous goods so they only get to choose the quantity at which they sell.

Question 5

profit maximization in perfect comp

Answer 5

marginal revenue= marginal cost

Question 6

what does second order condition tell

Answer 6

profit max level of quantity is where MC is increasing

Question 7

shut down condition in the short run

Answer 7

You should shut down if the price is less than average variable cost.

As you won’t be covering your fixed costs

Question 8

producer surplus

Answer 8

profits + fixed costs

Question 9

Long run shut down condition

Answer 9

Price is lower than average cost in the long run

Short run have to cover variable costs, however long run can’t run losses forever. Price has to cover all of costs.

Question 10

what does LR supply look like

Answer 10

straight horizontal line

Question 11

Efficiency of perfect comp

Answer 11

If all firms have the same market price all their marginal costs will be equal mci=mcj=p

The equilibrium is efficient

As… The social objective. Max sum of profits for all firms. Also captures consumer willingness

Choose q to max sum of profits. Way to do it is to find amounts of quantities for different firms so that price is equal to marginal cost.

Question 12

Monopoly

Answer 12

one firm, differentiated goods, price maker, high barriers to entry

Question 13

why can’t monopoly charge whatever they want

Answer 13

Cant charge high and sell loads as monopolist is still constrained by the market demand curve. As consumer may not be willing to pay the price set.

Question 14

What happens when one extra unit is sold in monopoly

Answer 14

• Increase in revenue as sold one more unit,

but actually decrease in revenue as supply increased so price chargeable for all units declines. Assumption is setting price once. These are called inframarginal units (units sold before the final unit sold).

Question 15

Monopolists problem

Answer 15

The key problem the monopolist must solve is how to balance two forces with the marginal cost gives the profit maximising choice.

This is MR=MC

Question 16

whats monopolist optimal choice

Answer 16

produce where demand is elastic asCant profit max as it doesn’t make sense mr=negative. And another value of production would give a higher profit

Price inelastic means reduce output, prices increase so increase in revenue and decrease in total costs (producing less) so increase profits. When inelastic not maximising.

Question 17

monopolists facing linear demand

Answer 17

higher price lower output compared to perfect comp

Question 18

Markup pricing

Answer 18

Rearranged to put price on its own

Price as a function of PED

Found that monopolist must charge on the elastic part of the demand curve

Denominator of equation must be between 0 and 1

Thus monopolist charges a markup on marginal cost as if denominator between 0 and 1.

Say it’s a 1/2 then the price is going to equal marginal cost as marginal cost divided by 1/2 is 2 x marginal cost

Scalling up marginal cost to determine price

Markup is lower the more elastic demand is, big falls in demand if increase price tooo much.

Question 19

Is monopoly outcome efficient compared to perfect comp

Answer 19

Compared to perfect competition monopoly outcome has a higher price and lower quantity.

Therefore consumers are worse off as they buy less and pay more. Firms are better off as they charge higher prices and make more profit than perfect competition at least in the long run.

To make a non-value judgment we use pareto efficiency.

A outcome is said to be pareto efficient when there is no way to make anyone better off without making someone worse off.

Therefore question is… is the monopoly price and quantity pareto efficient.

For monopoly- it is not pareto efficient as pareto improvements exist for all units of output between perfect comp and monopoly output. (is possible to make someone better off without making someone worse off)

Question 20

dead weight loss

Answer 20

Deadweight loss is change in consumer + producer surplus as move from monopoly to perfect competition.

Question 21

price discrimination

Answer 21

different prices sold to different consumers

Question 22

first degree price discrimination

Answer 22

First degree price discrimination- (perfect price discrimination)- different output units sold at different prices, prices differ between people.

each consumer is charged their marginal willingness to pay for each unit

Question 23

second degree price discrimination

Answer 23

Second degree price discrimination- different amounts sold at different prices e.g bulk buy discount. All consumers of a given amount pay same price e.g buy 5 pay same amount as everyone else buying 5

constructing price quantity packages targeted at low demand and high demand consumers

the purchase behavior will reveal the type of consumer

Question 24

third degree price discrimination

Answer 24

Third degree price discrimination- different people pay different prices depending on the type of person you’re e.g students pay student discount.