1 / 14

Microeconomics: Competitive vs. Monopoly Solutions

Analyze competitive supply and monopolist's equilibrium; explore effects of regulated prices on output and profits.

margareter
Download Presentation

Microeconomics: Competitive vs. Monopoly Solutions

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Exercise 3.4 MICROECONOMICS Principles and Analysis Frank Cowell November 2006

  2. Ex 3.4(1) Question • purpose: to derive competitive supply function • method: derive AC, MC

  3. Ex 3.4(1) Costs • Integrate MC to get total cost • Divide by q to get average costs • Differentiate to find minimum AC at • Average costs at this point are • If price is above this level find equilibrium where price = MC: • Solving this we get

  4. p  a —— b q*= Ex 3.4(1): Firm’s supply curve • Average cost • Marginal cost • Supply of output • Relation between price and output a+bq P p F0/q+a+0.5bq q q

  5. Ex 3.4(2) Question • purpose: to derive monopolist’s solution • method: derive AR, MR

  6. Ex 3.4(2) Monopolist’s equilibrium • Given the demand curve total revenue is Aq½Bq2 • So, MR is • Monopolist’s FOC (MR=MC) • Solving for q we get • And from this we have

  7. Ex 3.4(2): Monopoly output and price P • AC and MC curves • Demand (average revenue) • Marginal revenue • Profit-maximising output a+bq • MC and price at q** p** F0/q+a+0.5bq c** A 0.5bq A  bq q q**

  8. Ex 3.4(3) Question • purpose: to derive modified monopoly solution • method: derive modified AR, MR – watch out for discontinuity!

  9. Ex 3.4(3) Regulated monopolist • Price ceiling alters the effective demand curve • So AR is now: • Multiply by q and then differentiate to get MR: • MR is discontinuous, exactly where AR is kinked • Effect of price ceiling depends on position of MC relative to this discontinuity

  10. Ex 3.4(3): High price ceiling • AC and MC curves • Demand (average revenue) • Marginal revenue • Profit-maximising output • MC and price at q** p** • A high ceiling has no effect on equilibrium c** q q**

  11. Ex 3.4(3): Low price ceiling • AC and MC curves • Demand (average revenue) • Marginal revenue • Profit-maximising output p** • A low ceiling yields equilibrium at reduced output q0 • price = MC = price ceiling c** q q0 q**

  12. Ex 3.4(3): Medium price ceiling (i) • AC and MC curves • Demand (average revenue) • Marginal revenue • Profit-maximising output p** • A medium ceiling yields equilibrium at increased output q0 c** q q0 q**

  13. Ex 3.4(3): Medium price ceiling (ii) • AC and MC curves • Demand (average revenue) • Marginal revenue • Profit-maximising output p** • Again, a medium ceiling yields equilibrium at increased output q0 c** q0 q q**

  14. Ex 3.4: Points to remember • Make good use of a diagram to “see” the problem • Re-use the solutions • one part of the problem… • …helps to build the next. • Don’t be fazed by the presence of a discontinuity • everything is nice and regular either side of it.

More Related