2 Types of Monopolies 2) Price Discriminating Monopoly Single Price Monopoly To sell more => must lower price for all customers P > MC so DWL exists => not allocatively efficient EM EPC 2) Price Discriminating Monopoly Customers divided in groups Qty sold => could rise, fall or be unchanged DWL moves with QTY change Only Perfect Price Discrimination has NO DWL

Key Relationships to know….. Max. Profit Allocative Efficiency Socially Optimal Competitive Output Max. Total Revenue Fair or normal Profit Production Efficiency MC = MR P = MC P = MC P = MC MR = Zero P = ATC P = Min of ATC

2011 AP® MICROECONOMICS FREE-RESPONSE

2011 AP® MICROECONOMICS FREE-RESPONSE $24 units & 8 units (where MR = MC) (Price -ATC) = $24- $18 = $6 profit per unit No, P > MC $24 > 12 Inelastic. Unit elastic @ $20 (when MR = 0) Inelastic range is below price of $20 e) Price ceiling $22 9 units Falls as market gets bigger (8 to 9 units) f) 11 units => P = ATC “fair” economic profit = zero profit g) Perfect Price discrimination 10 units Zero CS turns into Producer Surplus Total Welfare Increase market gets bigger => 8 to 10 units No DWL => same quantity as perfect competition

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“Would it bother you to hear how little I paid for this flight?”

Monopolies & Elasticity Unit Elastic Elastic range D MR Inelastic Range ● ----------------- Monopolies will: Operate only in Elastic Portion of Demand Elasticity = 1 when MR = 0

-May or may not ↑ Welfare Monopoly Wrap-Up 2 Types of Monopolies: Price Discriminating Monopoly -Profit must rise -May or may not ↑ Welfare . Single Price Monopoly: Set’s MC = MR has DWL . Competitive Industry Produce at P = MC Same Qty as perfect competition

Single Price vs. Perfect Price Discrimination With PERFECT Price Discrimination Monopolies Profit Rises Deadweight Loss eliminated Consumer Surplus eliminated Total Surplus increases Single Price Monopoly Monopoly still earns a profit

Imperfect Price Discrimination Costs and Charge some customers more than P1 & profits will rise! Revenue D MR Example: raise price but offer coupons to some customers MC P1 Q1 E1 Monopoly Profit ATC ATC Quantity