LINEAR PRICING: MONOPOLY

Reference:

C& P, Ch 3, p69-73, Ch 4, p88-107.

Frank, Jennings, and Bernanke,  pp. 258-74

This lecture we consider the choice of price by firms which must use linear pricing.

We also review some fundamental concepts of welfare economics which will allow us to assess the economic efficiency of various pricing mechanisms.

Linear Pricing

Under linear pricing all customers pay the same price per unit for all units purchased.

That is, there is such a thing as a single price ($/unit) for the good.

We shall see linear pricing is likely to occur in the following circumstances:

  1. Where it is costless for customers to trade the goods amongst themselves (costless arbitrage)
  1. Where consumers purchase at most 1 unit, and the firm cannot identify individual customer’s willingness to pay.

Monopoly

Market supplied by a single firm.

  • this firm will have ‘market power’ i.e. is a price setter.
  • Monopolist faces market demand curve:

Linear pricing with discrete demand

The firm sets a linear price, P. Note consumers will purchase the good if their MB³P.

  • assume if customers indifferent they purchase the good.
  • Recall that this means the MB is the firm’s demand curve.

Hence, in our example from lecture 2 the firm:

    Sales

(Movies a month)

Price 

($ per unit)

  Elle Joy  

Market

 
30.00   1 0 1  
25.00   1 1 2  
20.00   2 1 3  
15.00   2 2 4  
10.00   3 2 5  
5.00   3 3 6  
2.00   4 3 7  
0.00   4 3 7  

 

 

or:

 

         
Market Sales

(Movies a month)

  Price

($ per unit)

    Revenue
1   30.00     30
2   25.00     50
3   20.00     60
4   15.00     60
5   10.00     50
6   5.00     30
7   2.00     14

Suppose MC = 3, and fixed cost is 5

TC = 5 + 3Q

Market Sales

(Movies a month)

  Price 

($ per unit)

Revenue   Cost Profit  
1   30.00 30   8 22  
2   25.00 50   11 39  
3   20.00 60   14 46  
4   15.00 60   17 43  
5   10.00 50   20 30  
6   5.00 30   23 7  
7   2.00 14   26 -12  

The firm maximises profit by choosing to set price 20 with an output of 3.

Alternatively:

Market Sales

(Movies a month)

Price 

($ per unit)

Marginal

Revenue

Marginal

Cost

Marginal

Profit

1 30.00 30 3 27
2 25.00 20 3 17
3 20.00 10 3 7
4 15.00 0 3 -3
5 10.00 -10 3 -13
6 5.00 -20 3 -23
7 2.00 -21 3 -24

Max profit by producing all units which increase profit.

That is produce all units for which MR>MC.
Our example from lecture 2

  Marginal Benefit

($ per unit)

Quantity

(Movies a month)

  Elle Joy  
1   3.00 2.50  
2   2.00 1.50  
3   1.00 0.50  
4   0.20 0.00  
5   0.00 0.00  

Complete the following tables:

         
Market Sales

(Movies a month)

  Price

($ per unit)

    Revenue
1          
2          
3          
4          
5          
6          
7          

Suppose MC = 0, and fixed cost is 1, hence

TC = Q

Market Sales

(Movies a month)

Price 

($ per unit)

Marginal

Revenue

Marginal

Cost

Marginal

Profit

1        
2        
3        
4        
5        
6        
7        

Consumer surplus

Suppose Elle could buy movie ticket for $20 per ticket. The she would receive a net benefit for the first movie she saw of $30 – 20 = $10, for the second movie of $20 –20 = $0, (Note she would not see a 3rd movie because her net benefit for that movie would be $10-20 = -$10.)

Elle’s net benefit or “consumer surplus” for seeing 2 movies would be $10+0 = $10……………

Order a unique copy of this paper
(550 words)

Approximate price: $22

Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees


We value our customers, and so ensure that our papers are 100 percent original. Our Team of professionals does not miss the mark; they ensure that step by step each paper is written uniquely. We never duplicate or work as we compare papers rest assured. We deliver our work a day before time to ensure that you don’t miss your deadlines. It is not only doing the work but delivering it at the right time. We capture the consequences of late remittances. .

Money-back guarantee

We value customer satisfaction here at popularessaywriters.com and make sure that you get the best value for your Money. It happens that sometimes you can pay twice for your order or may want to cancel it, or you feel that it doesn’t meet your requirements; our money back guarantee will give you the opportunity to get back your money. We will also refund 100% of money paid double. In case your paper does not satisfy your requirements , we request that you notify us via writing within 2 days otherwise on the third day we will assume that you have been satisfied. Do all your correspondences through our email address popularessaywriters@gmail.com.

Read more

Zero-plagiarism guarantee

At popularessaywriters.com, our professional writers know the consequence plagiarism does for our clients. We have updated software’s such as article checker and copyscape to check for originality of the custom papers before submission of the final paper to the you. Our guarantee to the customer is that we will write 100% original papers for them that are quality, timely and of low cost. We have experienced professional and competent PhD writers who will write quality custom papers for you..

Read more

Free-revision policy

. At popularessaywriters.com, we are proud to provide top-quality Essay writing service to our esteemed customers. We are ready to take up that challenging academic assignment that is giving you sleepless nights and simplify it for you according to your desired requirements. We are willing to revise your paper if it does not meet your requirements. At popularessaywriters.com, we do not compromise with quality; thus, we offer unlimited free revisions until the customer is satisfied with their custom paper. Our unlimited free revision services are provided under the following terms:.. .

Read more

Privacy policy

Popularessawriters.com knows that client’s information is an essential tool for our company. It means that whatever the client requests from our service is kept strictly confidential. It means that whoever writes for this company understands the terms and conditions hence you should not be worried because you will never see your work somewhere else...

Read more

Fair-cooperation guarantee

Rest assured that we will always be attentive to your needs and requirements. We belief in the phrase treat your neighbour as you would want them to treat you. We leave nothing to chance and always look forward to a good interaction with each other.. .

Read more

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency