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This chapter:
What quantity should the firm produce, and
what price should the firm charge?
( y ) p( y ) y c ( y ).
At the profit-maximizing output level y*
d( y ) d dc ( y )
p ( y ) y 0
dy dy dy
At the profit-maximizing output level y*,
MR(y*) = MC(y*).
$/output unit
a p(y) = a - by
p( y*)
aa
ab
2( b b ) MC(y) = a + 2by
a
y* y
aa
2(b b ) MR(y) = a - 2by
d dp( y)
MR( y) p( y)y p( y) y
dy dy
y dp( y)
p( y ) 1 .
p( y) dy
p( y) dy
Own-price elasticity of demand is
y dp( y)
so MR( y ) p( y ) 1 .
1
1
MR ( y*) p ( y*) 1 MC must be true.
p ( y*) 1 p ( y*)
This implies that
MC 1 k
1
E.g. if e = -3 then p(y*) = 3k/2,
and if e = -2 then p(y*) = 2k.
So as | e | goes down towards 1 the monopolist alters its output
level to make the market price of its product to rise.
Copyright © 2001 Addison Wesley Longman Slide 9- 17
Monopolistic Pricing & Own-Price Elasticity of
Demand
1
Since MR ( y*) p ( y*) 1 k 0,
we have 1
p( y*) 1 0
1
1 0
That is, 1 1 1 | |1.
So a profit-maximizing monopolist always selects an output level
for which market demand is own-price elastic (pricing rule 1).
1 k k
p( y*) 1 k p( y*)
1
1 1
is the monopolist’s price. The markup is
k k
p( y*) k k .
1 1
E.g. if = -3 then the markup is k/2,
and if = -2 then the markup is k.
The markup rises as the own-price
|elasticity| of demand goes down towards 1.
Copyright © 2001 Addison Wesley Longman Slide 9- 21
Price Discrimination
Price discrimina tion with two market segments [see Figure 9.12]
Objective monopolist : max P1 ( q1 ) q1 P2 ( q2 ) q2 C ( q1 q2 )
q1 ,q2
q1 q2
q
Price rule 3: The socially optimal price (which
maximizes the sum of consumer surplus and the
producer surplus) is the price at which the market
demand curve intersects the marginal cost curve
p = MC(q)
MR(y) = a - 2by
D(q)
(p1,q1) = monopolist’s price and quantity
p2 = socially optimal price (CS + PS is
maximal)
p1
MC(q)
p2