TAILIEUCHUNG - Microeconomics for MBAs 40

Microeconomics for MBAs 40. The Economic Way of Thinking for Managers. Microeconomics for MBAs develops the economic way of thinking through problems that MBA students will find relevant to their career goals. Maths is kept simple and the theory is illustrated with real-life scenarios | Chapter 12 Monopoly Power and Firm Pricing Decisions 13 consumer welfare that could be achieved by dissolving the monopoly and expanding production from Qm to Qc . This area helps explain consumers prefer Qc and producers prefer Qm . Figure a shows the additional benefits consumers would receive from Qc - Qm units the area under the demand curve QmabQc. The additional money consumers must pay producers for Qc - Qm units shown by the area under the marginal revenue curve is a much smaller amount only QmcdQc. That is the additional benefits of Qc - Qm units exceed the cost to consumers by the shaded area abcd. Consumers obviously gain from an increase in production. FIGURE The Costs and Benefits of Expanded Production If the monopolist expands production from Qm to Qc in part a consumers will receive additional benefits equal to the area bounded by QmabQc. They will pay an amount equal to the area QmcdQc for those benefits leaving a net benefit equal to the vertically striped area abcd. To expand production the monopoly must incur additional production costs equal to the area QmcbQc in part b . It gains additional revenues equal to the area QmcdQc leaving a net loss equal to the shaded area cbd. Thus expanded production helps the consumer but hurts the monopolist. Yet for virtually the same reason the monopolistic firm is not interested in providing Qc - Qm units. It must incur an additional cost equal to the area QmcdQc part b while it can expect to receive only QmcdQc in additional revenues. The extra cost incurred by expanding production from Qm to Qc exceeds the additional revenue acquired by the horizontally stripped area cbd. Thus an increase in production will reduce the monopolistic firm s profits or increase its losses . Notice that consumers would gain more from an increase in production than the monopolist would lose. The shaded area in part a is larger than the shaded area in part b . The difference is the triangular area abc. Chapter 12 .

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