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Managerial Economics Lectured by RUBA RUMMANA Asst: prof: A&S of AUST
Content
01 Lecture 3 Demand & supply 01
02 Lecture 4 Elasticity of demand and supply 12
03 Lecture 5 Theory of Utility 18
04 Lecture 6 Producer Equilibrium 23
05 Lecture 7 Theory of cost 26
06 Lecture 7B Theory of revenue 32
07 Lecture 8 Market structure 33
08 Lecture 9 Integration 44
Prepared by Khondoker Amin Uzzaman
ID: 15/02/51/002 MBA Fall-2015
School of Business AUST
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Managerial Economics
Demand
Lecture 3
Qd tea = β«{ππ‘ππ, ππ (πππππ), ππ(ππππ), Y, T}
Won price cross price
Low of demand
Ceteris Paribus
Qd tea = β«{ππ‘ππ, ππ (πππππ), ππ(ππππ), Y, T}
ππ‘ππ πππ‘ππ
5 10
8 6.5
12 1
20 0.25
ππ‘ππ
8 A
5 B
πππ‘ππ 0 6.5 10
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Qd = Β± a β bp
Constant value of slope slope
20-0.5p
Movement and shifting of demand curve
1. Movement along the demand curve when own price changes,
variable constant.
2. Shifting of the curve
Qd tea = β«{ππ‘ππ, ππ (πππππ), ππ(ππππ), Y, T}
Y= 5000 tk 5 tk @ 10 kg Y= 10000 tk 5 tk @ 25 kg Y= 3000 tk 5 tk @ 5 kg
ππ‘ππ
Y
D i D D ii
0 5 10 25 Qd tea
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Exercise 1: Y= income
ππ‘ππ
d di
0 Qd tea
Condition: Y
Exercise 2:
ππ‘ππ
d i d
0 Qd tea
Condition: Y
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Exercise 3:
ππ‘ππ
di
d
0 Qd tea
Condition: Price of milk
Exercise 4:
ππ‘ππ
di
d
0 Qd tea
Condition: price of coffee
****Own price variable shifting****
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Supply
50 kg onion
35 tk 50 kg 50kg = mkt = ss
30 tk 50 kg 40kg = mkt = ss
ππ ππ ππ π π }
Supply
Natural Import tax subsidy
Supply function Ceteris Paribus
ππ ππππ = β«{πππππ, ππ (π€βπππ‘), πππππ‘πππ , N, T, S}
Price ππ ππππ
Price ππ ππππ
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πππππ ππ ππππ
50 100
80 250
100 500
120 700
πππππ s
80 50
0 100 25 ππ ππππ
ππ ππππ = β«{πππππ, ππ (π€βπππ‘), πππππ‘πππ , N, T, S}
Price ππ π
πππ
50
0 80 100 150 ππ ππππ
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*** i for prime
Exercise 1:
πππππ Sβ
S
0 πππππ
*** Condition: factors price and own price constant
Exercise 2:
πππππ
S
Sβ
0 πππππ
*** Condition: subsidyβs and own price constant
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Exercise 3:
πππππ
Sβ
S
0 πππππ
*** Condition: Price of wheat and own price constant
Exercise 4:
πππππ
Sβ
S
0 πππππ
*** Condition: there occurs are Drought
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Equilibrium of Demand and Supply
P---- Qd ----- Qs ---- state of the market ----- pressure on
6---- 10 ----- 16 ----- surplus -------------- Price
4---- 12 ----- 12 ----- Equilibrium -------- Natural
2---- 16 ---- 10 ------ shortage ----------- Price
πππππ
S
Excess ss
6 4 E 2
D ππππππ 0 10 12 16
Excess D
Shift in equilibrium
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Case 1: πππππ Sβ
S
Pβ E Eβ P
Dβ
D
0 πππππ Q Qβ *** Condition Y Sub Case 2 Sβ πππππ S
E P Eβ Pβ Dβ D
0 Qβ Q Qd
*** Condition Y T
Qd = 200
3 - π
3
QS = -20+P
Find the equilibrium P and Q
In equilibrium Qd = Qs
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200
3β
π
3= β20 + π
P = 65
Q = 45
Qd = 45 = Qs
P
200/3
65 E
d
-20 0
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Elasticity of demand and supply Lecture 4 29/01/16
ππππππππ = 20 + 0.2 Ptea - 0.3 Pcoffee
β
βπππππππ (ππππππππ ) = 0 + 0 β 1 * 0.3 πππππππ
1β1
= - 0.3 πππππππ0
= - 0.3
Elasticity
Demand supply
1. Own price elasticity (Ι³ ππ‘ππ)
2. Cross price elasticity (Ι³ ππ‘ππ,ππππ,ππππππ)
3. Income elasticity (Ι³ π)
Appendix Differentiation Costing power function rules
Qd = β«(π) πππ‘ππ = β«(ππ‘ππ)
πππ‘ππ = 20 β 0.5 Ptea β
βππ‘ππ (Qd)= -1 * 0.5 ππ‘ππ
1β1
= -0.5 ππ‘ππ0
= -0.5
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ππ‘ππ = 5 Qtea = 10 Pcoffee = 8 Pmilk = 3 Y = 10000
πππ‘ππ = 20 β 0.5 Ptea + 0.2 Pcoffee β 0.3 Pmilk + .0001 Y
1. Own price elasticity (Ι³ π·πππ)
Ι³ ππ‘ππ = β
βππ‘ππ (πππ‘ππ ) Γ
ππ‘ππ
πππ‘ππ
= -0.5 Γ 5
10
= -0.25
= 0.25 < 1
Change in πππ‘ππ < change in Ptea
Comment: Tea is a necessary good
N:B = if Ι³ ππ‘ππ > 1
Comments: Tea is a luxury good
2. Cross price elasticity (Ι³ π·πππ,ππππ,ππππππ)
a. πππ‘ππ = 20 β 0.5 Ptea + 0.2 Pcoffee β 0.3 Pmilk + .0001 Y
Ι³ ππ‘ππ,ππππππ = β
βπππππππ (πππ‘ππ ) Γ
πππππππ
πππ‘ππ
= 0.2 Γ 8
10
= 0.16
Comments: Tea and Coffee are substitutes
N:B = if Ι³ ππ‘ππ,ππππππ = (+1)
Comments: Tea and Coffee are perfect substitutes
b. Ι³ ππ‘ππππππ = β
βπππππ (πππ‘ππ ) Γ
πππππ
πππ‘ππ
= - 0.3 Γ 3
10
= - 0.9
Comments: Tea and milk are complement
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ππ‘ππ = 5 Qtea = 10 Pcoffee = 8 Pmilk = 3 Y = 10000
N:B = if Ι³ ππ‘ππππππ = (-1)
Comments: Tea and Milk are perfect complements
3. Income elasticity (Ι³ π)
(Ι³ π) = β
βπ (πππ‘ππ) Γ
π
πππ‘ππ
= 0.0001 Γ 10000
10
= 0.1
Comments: Tea is a normal good
N:B = if (Ι³ π) = (-) negative
Comments: Tea is an inferior good
Question: Drive the function for coffee whenβ¦..
I. It is luxury.
II. It has one perfect substitutes
III. It has one perfect complements
IV. It is a normal good
I. Luxury = own price elasticity > 1
II. Cross elasticity +1 price substitutes
III. Cross elasticity -1 price complement
IV. Normal good = income elasticity
πΈπ
ππππππ = 20 β 4 Pcoffee + 1.25 Ptea β 3.3 Pmilk
I. Ι³ π·ππππππ = β
βπ·ππππππ (πΈπ
ππππππ ) Γ
π·ππππππ
πΈπ
ππππππ
= - 4 Γ 5
10
= - 2
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= 2 > 1
Comment: coffee is a luxury good
II. Ι³ π·πππ,ππππππ = β
βπ·πππ (πΈπ
ππππππ ) Γ
π·πππ
πΈπ
ππππππ
= 0.25 Γ 8
10
= 1
Comment: Coffee has one perfect substitutes
III. Ι³ π·ππππππ,ππππ = β
βπ·ππππ (πΈπ
ππππππ ) Γ
π·ππππ
πΈπ
ππππππ
= - 3.3 Γ 3
10
= -1
Comment: Coffee has perfect complement
IV. (Ι³π·ππππππ π) = β
βπ (πΈπ
ππππππ) Γ
π
πΈπ
πππ
= 0.0001 Γ 10000
10
= 0.1
Comments: Coffee is normal good
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Lecture 4 extend
Elasticity of a straight line demand curve using point elasticity formula =
ππππππ = πππππ πππππππ
πππππ πππππππ
P 4 A (Perfect Elastic Region) 3 B (Elastic Region) 2 M (Unit Elastic Region) 1 D (Inelastic Region) R (Perfect Inelastic Region) 0 1 2 3 4 Q
ππ = 2
2 = 1 = e = 1
ππ΅ = 3
1 = 3 = e > 1
ππ· = 1
3 = 0.33 = e < 1
ππ΄ = 4
0 = β = e = β
ππ
= 0
4 = 0 = e = 0
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Elasticity of supply
ππ·πΈππππ =
β
βππππ (πΈππππ) Γ
π·πππ
πΈππππ
= (+) ve
P es = 1
es = β
0 es = 0 Q
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Lecture 5 Theory of Utility
Utility measurement is the primary steps for demand creation.
Measurement of utility
Cardinal Ordinal Money
Tools -------{1. πππ‘ππ ππ‘ππππ‘π¦ (ππ)
2.ππππππππ ππ‘ππππ‘π¦ (ππ)
Units of consumption ------- TU --------- MU (Example of Mango ) 0 --------- 0 ------- 0 1st --------- 4 -------- 4 2nd --------- 7 -------- 3
3rd --------- 9 -------- 2 (Extra ) 4th --------- 10 -------- 1 5th --------- 10 -------- 0 6th --------- 8 -------- -2 Law of diminishing MU (increasing at a decreasing rate) MU
0 Q
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Consumer equilibrium condition under cardinal management =
Equal MU for every good = πππ₯
ππ₯ =
πππ¦
ππ¦ =
πππ§
ππ§ = β¦β¦β¦. π (constant utility of money)
πππ΅ > πππΆ Units of consumption ------- TU --------- MU (Example of Apple) 0 --------- 0 ------- 0 1st --------- 5 -------- 5 2nd --------- 9 -------- 4 3rd --------- 13 -------- 3 4th --------- 14 -------- 1 5th --------- 14 -------- 0 6th --------- 12 -------- -2 Ordinal Management
Tools {1. πΌπππππππππππ ππ’ππ£π (ππ)
2. π΅π’ππππ‘ ππππ
1. Indifference Curve Possibilities ------- x ------- y ------- Utility ------- State of the consumer A ------- 5 ------- 1 ------- U0 ------- Indifference B ------- 4 ------- 2 ------- U0 ------- Indifference C ------- 3 ------- 3 ------- U0 ------- Indifference D ------- 2 ------- 2 ------- U0 ------- Indifference y
a
b c d IC2=U1
IC1=U0
0 X
A
B C D
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Assumption:
I. x,y are completely substitutable
II. consumer always prefects more to less
III.
Slope of IC = βπ¦
βπ₯ = Marginal rate of substitution = MRSx,y =
πππ₯
ππ¦
Characteristic of ICs
(i) ICs are downward
(ii) Higher ICs indicate higher utility
(iii) Two ICs Will never interests
y
U2
U1
0 z
U1 A =B
U2 B= C
A β C
A
B
C
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(iv) ICs are convex to the origin
y
IC1
0 x
2. Budget line (BL)
M= Px . x + Px . y
100 = 5 Γ 10 + 10.5
100 = 100
If x=0
= M= P.x + Py.y
=Px 0 + Py.y
β΄ M= Py . y
Y = π
ππ¦
If y = 0 => M = Px. X + Py. Y
M= Px. X + Py . 0
X= π
ππ₯
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y
A
M/Py
B
IC3
IC2
B IC1
0 M/Px x
Slope of Ab (Budget line)
βπ¦
βπ₯ =
πππ¦πππ₯
= π
ππ¦ Γ
ππ₯
π
=ππ₯
ππ¦ (Price ratio)
B
πππ₯
πππ¦ =
ππ₯
ππ¦
= πππ₯
ππ₯ = πππ¦
ππ¦
Therefore both cardinal and ordinal approaches lead to the same conclusion about
consumer equilibrium.
Write down the demand function for the business manager
(By the employer)
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πππ΅π =
β«{π πππππ¦π΅π , π πππππ¦π·ππ, ππ(πππππ’π‘ππ πππ‘πππππ‘,ππππππ, ππ‘π), π¦(ππππππ¦ππ)π }
Lecture 6
Producer Equilibrium 04/03/2016
1. ISO quant/ ISO product (IQ)
2. ISO β Cost
1.ISO quant/ ISO product (IQ)
Possibilities ---------- L ----------A ------- Production ---------- State of the producer
A ---------- 5 --------- 1 ------- Q0 ----------- indifference
B ---------- 4 --------- 2 ------- Q0 ----------- indifference
C ---------- 3 --------- 3 ------- Q0 ----------- indifference
D ---------- 3 --------- 3 ------- Q0 ----------- indifference
L
A
IQ2= Q2
B IQ1= Q1
C D IQ = Q0
0 A
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Marginal rate of technical substitution
Slope of IQ = MRTSL,A = ππ΄
ππΏ =
πππΏ
πππ΄
Characteristics of IQ
(i) IQs are downward
(ii) Higher IQs indicated higher production
(iii) Two IQs will never intersect
Q1 => A = B
Q2 => B = C
A=C
A
A C Q2
B Q1
0 L
2.. ISO β cost
M = PL . L +PA . A
=4.10 +10.6
β΄ 100 = 100
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L = 0
M = PL . L +PA . A
= PLO +PA . A
=PA A
A= π
ππ΄
A
π
ππ΄ A
B
0 π
ππΏ L
Slope of AB = ππ΄
ππΏ =
πππ΄πππΏ
= ππΏ
ππ΄ = price ratio
A
A
B Q3
Q2
Q1
0 L
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B
πππΏ
πππ΄ =
ππΏ
ππ΄
πππΏ
ππΏ =
πππΏ
ππ΄
Production equilibrium
Lecture 7 Theory of cost
1. Land = L = rent = r
2. Labor = A = wages = w
3. Capital = K = interest = i
4. Organization = o = profit = π
Cost of producing Q = r+w+i+ π
βProfit is the prize of risk bearingβ
Types of cost
1. Total cost = total fixed cost + total variable cost
TC = TFC + TVC
2. Average cost = AC = ππΆ
π =
ππΉπΆ+πππΆ
π
AC = AFC +AVC
3. Marginal cost = MC = π
ππ (TC)
10------100
11------ 150
MC= 50
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Units of production ------- TC ------- MC
0 ------ 55
30
1st ------ 85
25
2nd ------ 110
20
3rd ------ 130
30
4th ------ 160
50
5th ------ 210
MC 50 βUβ shaped MC
30
20
0 Q
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Short Run cost curve
Cost MC AC AVC
AFC
0 Q
Minimum AC (AC=MC)
AC
MC MC AC
0 A B C Q
Production
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Q. What dose minimum AC imply
producer out put
4
A
AC > MC
AC = 4+4+4+4
4 = 4
AC = 4+4+4+4+5
5 = 4.20
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Long run cost curve
Cost
LAC
SMC1 SAC1 SMC2 SAC2 SMC3 SAC3
0 Q1 Qβ1 Q2 Q3
Other name of LAC = Long Run Envelope Curve
LACβ LMC
0 Q* Q
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*Draw the LAC From Five plant size
Cost
LAC
SMC1 SAC1 SMC2 SAC2 SMC3 SAC3 SMC4 SAC4 SMC5 SAC5
0 Q1 Qβ1 Q2 Q3 Q4 Q5
i. Given
IC = 5Q3 + 2Q2 + 13Q +7
Find AC and MC
β΄ AC = TC = 5π3 + 2π2 + 13π +7
π
= 5Q2 + 2Q + 13 +7/Q
β΄ MC = π
ππ (TC) = 15Q2 + 4Q + 13
ii. Given ,
AC = 5Q2 + 30Q + 5/Q
Find MC
IC = AC Γ Q
= (5Q2 + 30Q + 5/Q) Γ Q
=5Q3 + 30Q2 + 5
MC = MC = d/dQ (TC) = 45Q2 + 60
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Lecture 7 B
Theory of revenue
1. Revenue = R = total revenue = TR = PΓ Q
= 5 Γ 10
= 50
2. Average revenue AR = πΌπ
π = πΓπ
π = P
3. Marginal revenue MR = π
ππ (TR)
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Lecture 8 Market structure / 11.03.2016
Note:
3.1 Pure / Perfect
Assumption
a) Larger number of buyer and seller b) Homogenies product sold
Classcification
1. Time
Temporary
Parmanent
2. Durability
Temporary
Parmanent
3. Compitition
(দর ΰ¦ΰ¦·ΰ¦Ύ ΰ¦ΰ¦·ΰ¦· ΰ¦ ΰ¦Έΰ§ΰ¦― ΰ¦Ύΰ¦ ΰ¦ΰ¦° ΰ¦·ΰ¦Ώΰ¦·ΰ¦Ώΰ¦―ΰ§ Compitition ২ ΰ¦ͺΰ§ΰ¦°ΰ¦ΰ¦Ύΰ¦°)
3.1 Pure / Perfect
3.2 Imperfect
Most important roll of classification
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c) Perfect knowledge about the market d) No bar for entry and exit
3.1 (a) DD curve for a firm in the short run P
P=d= AR
0 Q
(b) Break even condition for firm in short run (P=MC)
P MC AC
B 40 P=d=AR
0 4 Q
B
π = TR β TC
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TR = P Γ Q = 40 Γ 4 = 160
TC = AC Γ Q = 40 Γ 4 = 160
π = 0
(Normal Profit) [π΄ =
ππΆ
π
β΄ ππΆ = π΄πΆ Γ π]
d = s => P/
P = MC <= P/Q
3.2 Imperfect
Imperfect
a. Mono poly
(single seller)
b. Oligo poly
(Few Seller)
Slightly differentiated
ΰ¦·ΰ¦Ώΰ¦―ΰ§ business ΰ¦ΰ¦°ΰ¦―ΰ§
c. Monopolistic Compitition
( either Homogenies/ slightly defferentiated )
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3.2 . a Monopoly
World
i. Price β output determination
Under natural monopoly (MC = MR)
P
0 M
π = TR β TC
TR = P Γ Q = QP1 Γ 0M = 0P1 GM
TC = AC Γ Q = 0W Γ 0M = 0WFM
π = P1GFW > 0 [ππ’ππππ ππππππ ππππππ‘ ]
MR P=d=AR Q
P1
W
G
F
MC AC Note:
p
0 Q
00
10
MR
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3.2.a
ii. Area of operation of natural Monopoly
*When MC > 0 ( )
P
e> 1
C e = 1 (MR= 0)
e<1 (MR < 0)
0 P=d=AR Q
MR = π
ππ (TR)
= π
ππ (PΓ Q)
= π
ππ {(βππ + πΆ)π}
= π
ππ (- MQ2 + CQ)
MR = -2 MQ +C
P= AR = -MQ +C
e = 1 => AR = π
2
C - π
2 = MQ
MQ = 2πΆβπΆ
2
β΄ MQ = πΆ
2
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Iff = if an only if
Iff MC > 0, The natural monopoly will operate in the elastic region (e> 1) of its demnd
curve
**When MC = 0
P
e> 1
e = 1
e<1
E(MC=MR)
0 MR P=d=AR Q
Iff MC = 0, Unit elastic region (e=1)
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Lecture 8 extend 13.03.2016
In perfect competition
3.1 Perfect competition
3.1. b) Shut down point
P MC AC AVC
Pd M
Pd1 Mβ 0 Q
M= Breakeven point MC = P
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3.2.C) Monopolistic Competition
3.2.C. i) Short Run Super Normal Profit of a firm (MC=MR)
P MC
AC
P1 G W F
E=(MC+MR)
0 M MR P=d=AR Q
TR= OP1 GM
TC=OWFM
π = P1GFW > 0
(Super normal profit)
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3.2.C. ii) Short run loss (MC=MR)
MC
P
AC
T1 Tβ
P1 G
E=(MC+MR)
0 M MR P=d=AR Q
TR = PΓQ = OP1 Γ OM
= OP1OM
TC= AC Γ Q = OT1 Γ OM
= OT1TβM
Loss = P1T1TβG
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3.2.C iii) Long run Normal profit (π΄πͺ = π΄πΉπ¨πͺ = π¨πΉ
)
P AC
MC
P1 Pβ
E=(MC+MR)
0 M MR P=d=AR Q
TR = P Γ Q = OP1Γ OM
= OP1PβM
TC = AC Γ = OP1PβM
π = 0 (Normal profit)
P MR
MC MC=MR=> Pβ P AC
Pβ
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3.2.2) Public utility regulation of a natural Monopoly
MC
P
AC
Pm M
PR R
Pc E(MC=MR)
MR P=d=AR
Qm QR QC Q
1. Natural monopoly P and Q = Pm and Qm => MC = MR
2. Regulated monopoly = P and Q = PR and QR => P = AC
3. Competitive P and Q = Pc and Qc = P = Mc
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Integration 18/03/2016
Pd = (Q-1
β«ππππ = β«(π β 1)ππ
= ππ+1
π+1 = β«(π)ππ - β«1ππ
= π1+1
1+1 β Q
= π2
2 - Q
i. Consumer supply (CS)
Pd = (Q-1)2 when P0 = 4
Q0 = 6
Find CS,
CS = β« (π β 1)2ππ β π0π0
0 π0
=β« (π2 β 2π + 1)π0
0 dQ - π0 π0
=β« (π)2ππ β 2π0
0 β« (π)ππ + 1
π0
0 β« (π)ππ β π0
π0
0π0
= [π3
3β π2 + π]
π0 - π0 π0
= 63
3β 62 + 6 β (6Γ4)
=6 Γ6 Γ6
3 β 36 + 6-24
=78-60
= 18
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45 | p r i n c e . p i r o n 0 1 6 7 3 0 0 9 8 4 6
ii. Produces surplus (PS)
PS = (Q+1)2 when P0 = 120
Q0 = 6
Find PS
PS = π0 π0 - β« (π + 1)2 πππ0
0
= π0 π0 - β« (π2 + 2π + 1) πππ0
0
= π0 π0 - β« π2 ππ + 2π0
0 β« (π) ππ + 1
π0
0 β« ππ
π0
0
=π0 π0 - [π2+1
2+1+ 2
π1+1
2+ π]
π0
= π0 π0 - [π3
3+ 2
π2
2+ π]
0
π0
= 120 Γ 6 - [63
3+ 66 + 6]
0
6
=720 - [216
3+ 36 + 6]
0
6
= 720 - [72 + 42]06
=720 - [114]06
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46 | p r i n c e . p i r o n 0 1 6 7 3 0 0 9 8 4 6
iii. Monopoly sell two goods x and y whose demand function are:
x = 25 β 0.5 Px
y = 30 β Py
And the combined cost function is C = x2 + 2xy + y2 + 20
(a) Profit maximizing level of output for x and y
(b) Profit maximizing level of output for (Px , Py)
(c) Maximum profit
(a) Profit maximizing level of output for x and y
π = TR βTC
= TRx + Try β TC
= (Px . X) + (Py . Y) β TC
={(50-2x)x + (30-y) y} β TC
= 50x β 2x2 + 30y β 42 β 2xy β y2 β 20
πxy= 50x β 3x2 + 30y β 2y2 β 2xy β 20
πxx= 50 β 6x β 2y = 0 (Γ π)
πyy = 30 β 2x β 4y = 0 (Γ π)
50 β 6x β 2y = 0 30 β 2x β 4y = 0
- + + 10y=40
Y= 4
X= 7
Side note:
X= 25-0.5 Px
0.5Px = 25-x
Px = 25βπ₯
0.5
Px = 50 β 2x
Y = 30-Py
Py= 30-y
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47 | p r i n c e . p i r o n 0 1 6 7 3 0 0 9 8 4 6
(b) Px= 50-2x= 36
Py = 26
(c) Οxy= 50x β 3x2 + 30y β 2y2 β 2xy β 20
iv. The MC of manufacturing x good is 6+10x-6z2. If the TC of producing of
function of good is 12. Find TC and AC
TC = 6x +10 π₯2
2 β 6
π₯3
3 +K [K = constant of integration]
X=2 then TC = 12
12 = 6 . 2 + 10 22
2 β 6
23
2 + K
K = 12 -12 β 20 + 16
K = - 4
TC = 6x + 10 π₯2
2 - 6π₯2
2 - 6π₯3
3 β 4
AC = ππΆ
π₯ = 6 + 5x β 2x2 -
4
π₯