Profit maximization Perfect competition & monopoly

7 important questions on Profit maximization Perfect competition & monopoly

What is the shutdown decision?

On the short run:
R covers VC
p>= SAVC (short run average VC)

long run shut down if P<AC

What is the lerner index?

tells us something about the nature of demand facing the firm

What are the conditions for perfect competition?

1. Large numer of firms
2. Homogeneous products
3. Free entry
5. input factors are mobile on the long run
6. No transaction costs
7. Firms are price takers
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What is the short run supply curve?

is positively sloped portion of the firm's short run mc curve above the minimum value of the AVC

shows how much the firm wil produce
captures that if R<VC it will shutdown

What is Hotelling's lemma?

supply curve is derived by partially differentiating the profit function

What for baarieres to entry are possible to keep the monopoly?

Technical- and legal barriers 


some action can be taken by the firm   (R&D, Lobbying)

Optimization of a monopoly:

MR=MC
downward sloping demand curve
degree of market power: L = (p-mc)/p =1/(-eQp)
profits>0 possible in the long run

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