ECON 001A Lecture Notes - Lecture 2: Marginal Revenue, Marginal Cost, Market Power

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28 May 2020

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Monopoly - the ability to raise price above marginal costs without fear of competition is called market power. Ex: price is 16, quantity is 2. Total revenue 1 = 16x2 = 32. If price drops to 14 and quantity is now 3. Total revenue 2 = 14x3 = 42. Profit maximizing quantity is where marginal cost and marginal revenue intersect then u draw a line down and that"s the quantity. This is also where profit maximizing price is. Where it intersects then u draw a vertical line up and where it hits the demand curve is where the profit max price is. Profit is the rectangle from the point on the profit maximum price down to where the vertical line hits the. Monopolist must consider demand curve to define price. Costs of monopoly: deadweight loss, corruption and inefficiency, just seeking favors from government. Benefits of monopoly: incentive for research and development leads to ecomonic growth, 50% in 1990s reduced deaths.

Related Questions

Based on market research, a film production company obtains the following information about the demand and production costs of its new DVD:

Demand: P = 1,000 -10Q

Total Revenue: TR =1,000Q 10Q^2

Marginal Revenue: MR =1,000- 20Q

Marginal Cost: MC=100 10Q

where Q indicates the number of copies sold and P is the price in dollars.

a. Find the price and quantity that maximizes the company's profit.

b. Find the price and quantity that would maximize social welfare (the competitive equilibrium).

c. Calculate the deadweight loss from monopoly.

taupemanatee473

A firm is producing where its marginal costs are at the lowest level. What can one most likely infer from this? a. there is either lost opportunity for further profits by producing more, or the firm should shut-down if it is competitive and price is at that low level. b. It is a price-taker who is producing too much. c. It is a monopolist who is producing the socially optimal quantity. d. The firm is producing rationally.

6. A single-price monopolist sets price a. where MR=demand. b. where supply=demand c. from the demand curve at the quantity for which MC=MR. d. where MR=MC.

7. Assume that the Law of Diminishing Marginal Product applies at the current output level of a competitive firm. The price is $20 and, at the current output level, marginal cost is $16 and average total cost is $20. To maximize profits the firm should: a. produce the current output level, since average revenue (price) = average cost. b. produce more since marginal revenue exceeds marginal cost at current output. c. produce less since marginal revenue is always below average revenue. d. any of the above is possible, without further information.

8. Which of the following statements is true? (i) When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price. (ii) When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price. (iii) Average revenue is the same as price for both competitive and monopoly firms. a. (i) only b. (iii) only c. (i) and (ii) d. (ii) and (iii)

9. If a firm in a competitive market triples the number of units of output sold, then total revenue will a. more than triple. b. less than triple. c. exactly triple. d. All of the above are potentially true.

10. When a competitive firm makes a decision to shut down, it is most likely that a. marginal cost is above average variable cost. b. marginal cost is above average total cost. c. price is below the minimum of average variable cost. d. fixed costs exceed variable costs.

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

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ECON 001A Lecture Notes - Lecture 2: Marginal Revenue, Marginal Cost, Market Power

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