19 April, 2006 Tests: Returned Reading: Finish Chapter 8 Chapter 11 Moniday HW 14 Due Monday Lecture 34 REVIEW___________________________________________________: VII.

Chapter 8. Managing in Competitive, Monopolistic and Monopolistically Competitive Markets. B. Monopoly 1. Assumptions, Sources of monopoly power. 2. Characterization !. "ptimizin# $ecisions. a. %raphically &. Analytically revie!__________________________________________________________ '. "&ser(ations Social Costs of Monopoly C. Monopolistic Competition . 1. Assumptions 2. Characterization !. "ptimizin# $ecisions. '. "&ser(ations. "ect#re____________________________________________________________ '. )he Social Costs of Monopoly )he social costs of monopoly. )here is no entry an$ e*it, so monopoly profits can &e permanent. a+ Monopoly pricin# is inefficient. )he #raph &elow allows a comparison &etween the monopolist, an$ a competitor with similar cost cur(es. ,-ecall that a competitor woul$ &e force$ to pro$uce where MC . A)C.+ / Monopoly /rofits /m /c . 0 . A- . / M1c 1 MC A)C

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Continuin# with the a&o(e e*ample, what woul$ a competitor &e force$ to char#e2 MC . A)C Calculate profits, price an$ A)C. &+ -esults Compare$ to a competitor, a monopolist i+ char#es a hi#her price, ii+ pro$uces a lower 3uantity i(+ 4arns persistent economic profits. A numerical e*ample. Suppose / . 90 5 1 an$ )C . '00 6101 6 12 M- . 90 5 21, MC . 10 6 21 )hus, 70 . '1 an$ 1 . 20 / . 80 /rofits are 80,20+ 5 9'00 610,20+ 6 202: 1'00 ; 1000 '00 Compare outcomes to the competitor in a <- e3uili&rium. )he competitor will pro$uce where MC . A)C. A)C . '00=1 6 10 6 1, or 10 6 21 1 . 20 / . >0 /rofits e3ual 0 ?otice, with mar@et $eman$ of 90;1, 1 must e3ual '0 for / to e3ual >0. )hus, a secon$ firm must e*ist in the mar@et in a competiti(e e3uili&rium. Note At is possi&le to conBure up num&ers where 3uantity is not lower for the monopolist than for the competitor ,we are comparin# a sin#le firm to multiple firms in the mar@et, so usin# a sin#le cost cur(e is not the &est e*ample+. Cowe(er, price will $efinitely &e hi#her. . '00=1 610 6 1