ISI Interview Question

[Asd1995]

Nothing really, it just tells you that returns to scale are not >1 i.e.  if he produced anywhere on the demand curve where profits are positive (which may be on the inelastic part, he will make infinite profits in the long run irrespective of the output he produces (given demand for its product is inelastic at the price p0)

[Econ17]

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[Asd1995]

irrespective. rts just legitimizes the problem.

[Econ17]

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[Econ17]

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[Daffodils]

How did u do this

[Asd1995]

I don't know, but write the general term T(k)  as (k+1)(k-1)/k^2 and multiply with T(k+1) and T(k-1). Terms will cancel out.

1/2 hi hoga mostly

[Algaeconomics]

Eh... Lerner's index tells us that monopolist operates on inelatic part of dd curve.
P- MC/ MC = 1/|€|

Only if € is between 0 and 1 can Monopolist have P>MC

[Algaeconomics]

Yeah 1/2

[Asd1995]

No, there can be cases where monopolist charges P<MC (say he gets more ad revenue depending on quantity produced etc)

The profit maximising condition for a monopolist is MR=MC

For e<1, MR<0. Given returns to scale are <=1, average costs will increase with higher production, so marginal costs must be positive. Hence MR=MC cannot be true at that point. Refer to Hal Varian for a detailed proof.

[Asd1995]

Dude, may bad. Returns to scale <1 ensures decreasing average costs hence positive marginal costs to MR=MC cannot hold at e<1.