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Suppose a monopolist adopts a technology that allows him to produce his product at lower cost. What is the likely effect on the monopoly price ?

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  • $\begingroup$ This is a simple shift in the supply-demand model. $\endgroup$ – DornerA Apr 26 '16 at 14:20
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$P=\frac{\epsilon}{\epsilon +1} MC$

This is the markup rule for price-setting firms.

Now, it is clear that a firm with monopoly power will never set $P=MC$. However, we can assume for now that the term involving epsilon is fixed for our firm with monopoly power.

If this firm adopts technology that reduces costs, what do you think will happen to the marginal cost curve (in what direction does the marginal cost term move in the above equation)?

Given the expected change in marginal cost, in what direction should price change?

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It depends on what cost function the monopoly is facing. If the marginal cost function is not changing then there would be no change in pricing or quantity.

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