Chapter 25-26 Monopoly Part I (Introduction (Perfect competition each…
each firm is a price-taker because it is too small relative to the market to influence price
Monopoly: only one firm in the market
A monopolist is not a price-taker: the firm along decides market price
The monopolist chooses price, but not independently of output
The monopolist is constrained by the demand
(high price low demand)
We can think of monopolists as choosing price (and letting quantity be determined by demand) or choosing quantity (and letting price be determined by demand)
equivalent methods: we will study the monopolist's problem using
as the choice variable
Where p(q) is the inverse demand,
revenue is r(q)=p(q)*q
the profit is π = r(q) − c(q)
The FOC gives MR=MC
About the marginal revenue
The first term is the price, and the second term is how price changes as q is changed multiplied by output (negative if q is increased).
Increasing q means selling more units ([ositive effect) but at a lower price (negative effect)
The monopolist will never supply an output at which MR is negative MR<0 => ε > −1. This corresponds to the inelastic part of the demand curve.
In other words, the monopolist will never operate in the
part of demand
Taxing the monopolist
Suppose a tax of t per unit is placed on the monopolist.
This is equivalent to an increase in the MC. The monopolist will restrict output
Suppose the monopolist must pay a fraction τ of his profit as tax.
His output will not change: whatever q maximises π will also maximise (1−τ)π
If the government mandates that the monopolist price as a perfectly competitive firm: by setting p=MC, the monopolist might m
ake losses at that price and prefer to go out of the business
This will occur if AC(q) is above MC(q) at qmc
large fixed costs, low marginal costs, such that imposing p=MC would generate losses for the firm
Regulators can mandate p=AC(y)>MC(y)
Alternatively, regulator can mandate p=MC(y) and provide subsidy to the firm to cover losses