?#060;/P>

  1. Explain why there is a lack of supply curve for a monopolistic firm.

?#060;/P>

  • Supply curve is a curve that shows the relationship between the quantity supplied and the price of a good.
  • There is no unique relationship between market price and quantity supplied in monopoly.
  • Maximize profit by producing the output at which MR = MC
  • But MR ?#060;/FONT> P
  • \ We have to know the demand curve and MC curve
  • MR depends on the slope of the demand curve
  • \ Different demand curve can cause the same output at different price
  • Quantity supplied does not depend on the market price
  • The firm is a price searcher




?

  1. The manager of a monopoly firm is thinking about selling his product according to the following price schedule:
For the first unit that the consumer buys, price = $10
For the second unit that the consumer buys, price = $9
For the third unit that the consumer buys, price = $8
For the fourth unit that the consumer buys, price = $7
For the fifth unit that the consumer buys, price = $6
For the sixth unit that the consumer buys, price = $5

Sketch the shape of the budget line for a consumer that faces such a price schedule. (Plot the schedule with "all other goods" on the vertical axis and "goods sold by the firm" on the horizontal axis.)

  • Suppose the price of all other goods is the same for each unit

Combination

Goods sold by the firm

All other goods

A

0

N0

B

1

N1

C

2

N2

D

3

N3

E

4

N4

F

5

N5

G

6

N6

H

X0

0

?#060;/P>

  • If the consumer spend all his money on "all other goods", he gets no goods sold by the firm.
  • If he wants to have one quantity of the goods sold by the firm, he must forgo (N0 ?N1) quantity of all other goods.
  • If he wants to have one more quantity of the goods sold by the firm, he must further forgo (N1 N2) quantity of all other goods.
  • As the more goods sold by the firm is bought, the less is the price of the last unit.
  • \ N0 ?N1 > N1 ?N2 > N2 ?N3 > ?




What is the rationale for the manager to adopt such a pricing method?

  • A buyer is willing to pay different amounts for different units of the same goods.
  • The more a buyer buys the same goods, the fewer amount he is willing to pay.
  • This behaviour is shown by the consumer’s demand curve, which is downward sloping.
  • So, buyers would buy more goods if the price is lower when more goods is bought.
  • It is known as the price discrimination.
  • This method increases profit to the firm.




Compare the change of consumer surplus when the monopoly firm adopts the above price schedule instead of charging a uniform price for each unit of product sold.

  • The consumer surplus is decreased.
  • It is extracted by the monopoly with price discrimination.
  • The larger the number of different prices that can be charged, the greater is the firm’s ability to increase its revenue.



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