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ECON 208 Lecture Notes - Lecture 15: Price Discrimination, Profit Maximization, Perfect Competition

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School
McGill University
Department
Economics
Course
ECON 208
Professor
adellinesaillard

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ECON 208 Full Course Notes
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ECON 208 Full Course Notes
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Document Summary

Entire output is made by a single producer. A monopolist faces a negatively sloped demand curve: if the monopolist charges the same price for all units sold, its tr. The monopolist must reduce the price to increase its sales -- thus the mr curve is below the demand curve. Tr reaches maximum when mr becomes 0: sr profit maximization for a monopolist. Profit-maximizing level of output - where mc = mr. The size of fixed costs determines whether a monopolist earns positive economic profits: sr profit maximization. Unlike a competitive firm, the monopolist does not have a supply curve because it chooses the price. Can we compare the monopoly outcome to the competitive outcome: in a perfectly competitive industry price = mc, but a monopolist produces at a lower level of output, with price exceeding mc. Despite of incentives to enter, effective entry barriers allow monopoly profits to persist in the long run: two types.

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Related Questions

The table below presents the demand schedule and marginal costs facing a monopolist producer.

Q P($) TR($) MR($) MC($)
0 8     -
1 7     1
2 6     2
3 5     3
4 4     4
5 3     5
6 2     6
7 1     7
8 0     8
 

 

Instructions: Round your answers to the nearest whole number and include a negative sign if appropriate. Leave no cells blank. Enter 0 if appropriate.

a. Fill in the total revenue and marginal revenue columns.

b. What is the profit-maximizing level of output?

c. What price will the monopolist charge for the quantity in part (b)?

1. Which of the following is true under a monopoly?

  • A. Monopolist chooses the highest possible price.
  • B. Monopolist chooses a price that is always higher than marginal cost of production.
  • C. Marginal revenue of a monopolist is price.
  • D. None of the above are true for monopoly.

2. You are the manager of a monopoly that faces a demand curve described by P = 230 -20Q. Your costs are C = 5 +30Q. The profit-maximizing output for your firm is:

  • A. 4
  • B. 5
  • C. 6
  • D. 7

3. Which of the following is true?

  • A. A monopolist produces on the inelastic portion of its demand.
  • B. A monopolist always earns an economic profit.
  • C. The more inelastic the demand, the closer marginal revenue is to price.
  • D. In the short run a monopoly will shutdown if P < AVC.

4. In a competitive industry with identical firms, long rum equilibrium is characterized by:

  • A. P = AC
  • B. P = MC
  • C. MR = MC
  • D. All of the above

5. You are the manager of a firm that sells its product in a competitive market at a price of $50. Your firm's cost function is C = 40 + 5Q2. Your firm's maximum profits are:

  • A. 125
  • B. 250
  • C. 100
  • D. 85

6. A perfectly competitive firm faces:

  • A. A perfectly elastic demand function
  • B. A perfectly inelastic demand function
  • C. a demand function with unitary elasticity
  • D. none of the above

Suppose a monopolist faces a demand curve for its output of P = 300−Q. This means that the marginal revenue curve of the monopolist is M R = 300 − 2Q. Assume that the marginal cost of production is constant and equal to $40.

a) Write down an expression for the monopolists profit, as a function of the quantity of output it produces.

b) If the monopolist must charge the same price for all units of output that it sells (that is, if the monopolist is a single price monopolist), what level of output will maximise the monopolists profit? What price will the monopolist charge? What is its level of profit?

c) If this were a competitive market instead of a monopoly, what level of output would be produced and what price would be charged? What is the level of profit for firms if it were perfectly competitive?

d) Draw a diagram of demand, marginal revenue, and marginal cost that illustrates your answer to part b). From this work out consumer surplus and producer surplus.

e) Draw the same diagram but for your answer to c), the case of the competitive market. From this work out consumer surplus and producer surplus. How much deadweight loss is there from the monopoly? Why?