Economics 111.3 Winter 14 April 2 nd , 2014 Lecture 30 Ch. 13: Pure monopoly
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Economics 111.3 Winter 14
April 2nd, 2014Lecture 30
Ch. 13: Pure monopoly
FINAL EXAM is based on chapters 3, 4, 5 (up to p. 116), 6 (up to p. 138), 8, 9, 10 (up to p. 230, 11, 12, 13, and 14Its format: 100 Multiple-Choice
Questions When and Where: April 21, from 7:00 p.m. to 10:00 p.m; STM 140Extra Office Hours: April 19, from1:00 p.m. to 3:00 p.m.
Final Exam:
Comparing Monopoly and Perfect Competition and the Inefficiency of Monopolya recap
Points of Interest
Regulating a monopoly: an introductory note
• Government may regulate the prices that the monopoly charges.–The allocation of resources will be
efficient if price is set to equal marginal cost (P = MC). This is called the “socially optimal price”, and regulation is called “socially optimum”
Q
DMR
MCATC
P
unregulatedmonopoly price
unregulatedmonopoly priceM
Qm
Pri
ce a
nd
Co
sts
Pm
Natural Monopoly Case
Regulated Monopoly: Natural Monopoly Case
Instead of Socially Optimum Price (where P = MC)We use Fair Return Price ( where P = ATC)
Q
DMR
MCATC
PSocially Optimal Price
Price = MC
Socially Optimal PricePrice = MC
M
Qm Qr
Pri
ce a
nd
Co
sts
Pm
Pr r
Q
DMR
MCATC
PSocially Optimal Price
Price = MC
Socially Optimal PricePrice = MC
M
Qm Qr
Pri
ce a
nd
Co
sts
Pm
Pr rLOSS
Answer the following questions:
A. If the company were to build the bridge, what would be its profit-maximizing price?
B. What would be the efficient level of output? Should the company build the bridge? What would be its profit?
Let us focus on consumer surplus
PRICE DISCRIMINATION
Price discrimination is based on differences in “willingness to pay”
• The key idea behind price discrimination is to convert consumer surplus into economic profit for the monopoly.
• Price discrimination is the business practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same.
NB!In order to price discriminate, a monopolist must be able to:
• Identify groups of customers who have different willingness to pay (elasticities of demand);
• Separate them in some way; and • Limit their ability to resell its product
between groups.
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