2. Economics 111.3 Winter 14 April 2 nd, 2014 Lecture 30 Ch. 13: Pure monopoly

3. FINAL EXAM is based on chapters 3, 4, 5 (up to p. 116), 6 (up to p. 138), 8, 9, 10 (up to p. 230, 11, 12, 13, and 14 Its format: 100 Multiple-Choice Questions When and Where: April 21, from 7:00 p.m. to 10:00 p.m; STM 140 Extra Office Hours: April 19, from 1:00 p.m. to 3:00 p.m. Final Exam:

4. Comparing Monopoly and Perfect Competition and the Inefficiency of Monopoly a recap

6. Points of Interest

10. Regulating a monopoly: an introductory note Government may regulate the prices that the monopoly charges. –The allocation of resources will be efficient if price is set to equal marginal cost (P = MC). This is called the “socially optimal price”, and regulation is called “socially optimum”

13. Q D MR MC ATC P unregulated monopoly price unregulated M QmQmQmQm Price and Costs PmPmPmPm Natural Monopoly Case

14. Regulated Monopoly: Natural Monopoly Case Instead of Socially Optimum Price (where P = MC) We use Fair Return Price ( where P = ATC)

16. Q D MR MC ATC P Socially Optimal Price Price = MC Socially Optimal Price Price = MC M QmQmQmQm QrQrQrQr Price and Costs PmPmPmPm PrPrPrPr r

17. Q D MR MC ATC P Socially Optimal Price Price = MC Socially Optimal Price Price = MC M QmQmQmQm QrQrQrQr Price and Costs PmPmPmPm PrPrPrPr r LOSS

20. Answer the following questions: A.If the company were to build the bridge, what would be its profit- maximizing price? B.What would be the efficient level of output? Should the company build the bridge? What would be its profit?

22. Let us focus on consumer surplus

23. PRICE DISCRIMINATION Price discrimination is based on differences in “willingness to pay” The key idea behind price discrimination is to convert consumer surplus into economic profit for the monopoly. Price discrimination is the business practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same.

28. NB! In order to price discriminate, a monopolist must be able to: Identify groups of customers who have different willingness to pay (elasticities of demand); Separate them in some way; and Limit their ability to resell its product between groups.