Recitation 6 Notes
1. Outline
a. Exam sheets from last time
b. Office is PA 202: Office Hours are 2:00 – 4:00
a. I encourage everyone to stop by if they have any questions or need any clarifications
c. Next week we will do a touch point quiz on monopolies and price discrimination to make sure
everyone is getting the concepts. I will try to make it multiple choice so that you can get a
little practice before the next midterm.
d. Little Test Taking note for Dr. Conway’s Class: Appeal if you have any doubt.
e. Review of Monopolies
f. Price Discrimination Under Monopolies
2. Review of Monopolies
a. A pure monopoly is an industry in which there is only one supplier of a product for which
there are no close substitutes and in which it is very difficult or impossible for another firm to
coexist.
b. Barriers to Entry are attributes of a market that make it more difficult or expensive for a
new firm to open for business than it was for the firms already present in that market (in
other words, the incumbent has an advantage)
a. Legal Restrictions – post office
b. Patents – temporary monopoly to incentivize research
c. Control of a scarce resource or input – south African diamond syndicate
d. Deliberately erected entry barriers – start costly lawsuits against new rivals
e. Sunk Costs
f. Technical superiority
g. Economies of Scale
c. A natural monopoly is an industry in which advantages of large-scale production make it
possible for a single firm to produce the entire output of the market at lower average costs
than a number of firms each producing a smaller quantity.
d. Determining the Profit-Maximization Output
a. Find the output at which MC = MR or the last reported value where MR>MC (on a
graph you will be able to find the exact value) to select the profit-maximizing output
level
b. Find the height of the demand curve at that level of output to determine the
corresponding price
c. Compare the height of the demand curve with the height of the AC curve at that output
to see whether the net result is an economic profit or loss.
e. Monopoly profits are any excess of the profits earned persistently by a monopoly firm over
and above those that would be earned if the industry were perfectly competitive.
f. Long run profits comparison between monopolies and perfect competition
a. Perfectly competitive firms will not have any long run economic profit because more
firms will enter until no one is making economic profit
b. Monopolies can make economic profit
3. Price Discrimination
a. Price discrimination is the sale of a given product at different prices to different customers of
the firm when there is no difference in the costs of supplying these customers. Prices are also
discriminatory if it costs more to supply one customer than another but they are charged the
same price.
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b. When a firm charges discriminatory prices, profits are normally higher than when the firm
charges non-discriminatory (uniform) prices because the firm then divides customers into
separate groups and charges each group the price that maximizes its profits from those
customers.
c. The marginal revenue from a sale to Group A customer must be the same as that from the sale
to Group B consumer
d. Given price and output in one of two markets, to determine the profit-maximizing output and
price in the other market under price discrimination, do the following:
i. Draw the demand and marginal revenue curves for the different customer groups
side by side
ii. For the first market, draw a horizontal line through the point corresponding to the
marginal revenue – quantity combination, which will set the price and quantity for
Customer Group A at (Pa, Qa)
iii. Knowing the marginal revenue H and output (Qa), point J, for the first market,
find the profit maximizing sales quantity for the 2nd market where the horizontal
line cuts the MR curve for the 2nd group, so that MR levels are the same for both
customer groups.
iv. Knowing the marginal revenue H and point maximizing sales quantity Qb for the
second market, determine the 2nd customer groups profit maximizing price Pb,
point W, by locating the point on the demand curve corresponding to the profit
maximizing quantity.
4. Price Discrimination
Unique Price (No price discrimination):
Expand production as long as MR>MC and stop MR=MC.
Max. profit at Q=5 and P=9 and so profit=19
Price
Qtotal
14
13
12
11
10
9
8
7.5
7
6
5
4
3
2
1
0
1
2
3
4
5
6
7
8
10
12
14
16
18
20
FC
VC
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
TC
0
5
10
15
20
25
30
35
40
50
60
70
80
90
100
MC
1
6
11
16
21
26
31
36
41
51
61
71
81
91
101
TR
5
5
5
5
5
5
5
5
5
5
5
5
5
5
MR
0
13
24
33
40
45
48
52.5
56
60
60
56
48
36
20
Profit
13
11
9
7
5
3
4.5
3.5
2
0
-2
-4
-6
-8
Now segment the market into two groups → we see two different demand curves: Q1 and Q 2
2
-1
7
13
17
19
19
17
16.5
15
9
-1
-15
-33
-55
-81
Group1:
Profit is maximized at Q=5 and P=9 so TR=45
Qold
Price
0
1
2
3
4
5
6
6.5
7
8
9
10
11
12
13
TRold
14
13
12
11
10
9
8
7.5
7
6
5
4
3
2
1
MRold
MC
0
13
24
33
40
45
48
48.75
49
48
45
40
33
24
13
13
11
9
7
5
3
1.5
0.5
-1
-3
-5
-7
-9
-11
5
5
5
5
5
5
5
5
5
5
5
5
5
5
10
12
14
Chart Title
20
15
10
5
0
0
2
4
6
8
-5
-10
-15
Price
MRold
MC
3
Group2:
Profit is maximized at Q=2 and P=6 so TR=12
Qyoung Price
TRyoung MRyoung MC
0
14
0
0
13
0
0
12
0
0
11
0
0
10
0
0
9
0
0
8
0
0.5
7.5
3.75
7.5
1
7
7
6.5
2
6
12
5
3
5
15
3
4
4
16
1
5
3
15
-1
6
2
12
-3
7
1
7
-5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
Chart Title
10
8
6
4
2
0
-2
0
1
2
3
4
5
6
7
8
-4
-6
Series1
Series2
Series3
Total profit with price discrimination: P1*Q1+P2*Q2 -TC=45+12-36=21 which is bigger than the profit with unique
price case (19).
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