Yale Microeconomics 115 Final Exam
Good and bad news of marginal revenue ✔️✔️-Good: sells an additional unit (gains p1)
-Bad: All previous units are now cheaper (loses deltaP(Q1))
Marginal revenue in perfect competition ✔️✔️only need to think about prices
MR(Q)= P2 + deltaP/deltaQ(Q1)
first degree price discrimination ✔️✔️(NOT REALISTIC) charging each individual customer a different
price based on their willingness to pay
-firms know each individual's WTP and can charge each consumer that amount
-No more DWL of Monopoly
-Monopolist captures all the surplus (PS, no CS)
third degree price discrimination ✔️✔️(VERY REALISTIC) Firms know willingness to pay a big group, so
different prices are charged to different market segments
natural monopoly ✔️✔️a monopoly that arises because a single firm can supply a good or service to
an entire market at a smaller cost than could two or more firms
-in discussing costs, we assume that eventually average cost would rise (decreasing RTS) but sometimes
that is not true and average costs continue to go down forever (Increasing RTS)
examples of natural monopoly ✔️✔️Railroads, power grid, piped water
Monopolist profit maximizing optimal point ✔️✔️-Where MR and MC intersect (Q*)
-Go up to demand curve and across (P*)
implications for cost of natural monopoly ✔️✔️-a usual advantage of competition is it pushes AC to
the minimum (down) which is good for consumers
, -when AC always decreases as Q increases, competition actually means that minimum costs are higher
than they would be with one firm
ex. Amtrak needs competition and decided to lay second set of railroads alongside existing ones: no big
winner there
how are natural monopolies efficient? ✔️✔️-a natural monopoly is one in which the efficient number
of firms is one
-gets lowest average cost with only one firm
-MC tends to be constant
-FC tends to be huge
drawbacks of natural monopoly ✔️✔️-the one firm will have extreme market power
one firm is how we drive costs down to their minimum
**Need policy
natural monopoly policy/gov't approaches ✔️✔️1. Nothing
-could have competition that is inefficient (increases costs)
-could have huge producer surplus (1 firm)
2. Public ownership
-Government provides to go directly
3. Regulated private ownership
-Government controls the price to avoid high deadweight loss
price ceilings in perfect competition ✔️✔️result: fall in number of trades and a decrease in Q
Good and bad news of marginal revenue ✔️✔️-Good: sells an additional unit (gains p1)
-Bad: All previous units are now cheaper (loses deltaP(Q1))
Marginal revenue in perfect competition ✔️✔️only need to think about prices
MR(Q)= P2 + deltaP/deltaQ(Q1)
first degree price discrimination ✔️✔️(NOT REALISTIC) charging each individual customer a different
price based on their willingness to pay
-firms know each individual's WTP and can charge each consumer that amount
-No more DWL of Monopoly
-Monopolist captures all the surplus (PS, no CS)
third degree price discrimination ✔️✔️(VERY REALISTIC) Firms know willingness to pay a big group, so
different prices are charged to different market segments
natural monopoly ✔️✔️a monopoly that arises because a single firm can supply a good or service to
an entire market at a smaller cost than could two or more firms
-in discussing costs, we assume that eventually average cost would rise (decreasing RTS) but sometimes
that is not true and average costs continue to go down forever (Increasing RTS)
examples of natural monopoly ✔️✔️Railroads, power grid, piped water
Monopolist profit maximizing optimal point ✔️✔️-Where MR and MC intersect (Q*)
-Go up to demand curve and across (P*)
implications for cost of natural monopoly ✔️✔️-a usual advantage of competition is it pushes AC to
the minimum (down) which is good for consumers
, -when AC always decreases as Q increases, competition actually means that minimum costs are higher
than they would be with one firm
ex. Amtrak needs competition and decided to lay second set of railroads alongside existing ones: no big
winner there
how are natural monopolies efficient? ✔️✔️-a natural monopoly is one in which the efficient number
of firms is one
-gets lowest average cost with only one firm
-MC tends to be constant
-FC tends to be huge
drawbacks of natural monopoly ✔️✔️-the one firm will have extreme market power
one firm is how we drive costs down to their minimum
**Need policy
natural monopoly policy/gov't approaches ✔️✔️1. Nothing
-could have competition that is inefficient (increases costs)
-could have huge producer surplus (1 firm)
2. Public ownership
-Government provides to go directly
3. Regulated private ownership
-Government controls the price to avoid high deadweight loss
price ceilings in perfect competition ✔️✔️result: fall in number of trades and a decrease in Q
