Download Chapter 7 The Firm

Chapter 7
The Firm
Business Firm
• Employs factors of production
• Produces goods and services
• Sells to consumers, other firms, or the
government
• We work for and buy from firms
Market
• Two sides
– Buyers
• Utility is major decision making device
– Sellers
• How do they make decisions
How do the two sides come
together?
• Market Coordination
– Invisible Hand (Adam Smith)
– Market guides individuals into activities at
which they are the most efficient
– Pushes sellers to produce certain things and
buyers to instruct what to produce
– Equates supply and demand
How does the firm decide what
to produce?
• Managerial Coordination
– Guides individual firm production decisions
– Thus…invisible hand of the firm
Why follow this invisible hand?
• Firms are formed because greater benefits
of working as a team than working as
individuals
Problem with teamwork
• Shirking
– Putting forth less effort than your originally
agreed to
– Problem because shirker gains ALL benefits
from shirking but costs are spread over the
entire team
Can shirking increase or
decrease?
• Yes!!
• As the benefits of shirking increase so
does the amount
• If the shirker must bear the full cost of
shirking then shirking will decrease
How can we decrease shirking?
• Manager’s duty or MONITORING
• Reward productive workers and punish
shirkers
• Preserves the benefit of team production
• Reduces the benefits of shirking
Who monitors the monitor?
• Salary usually tied into production
• Called Residual Claimant
– Person who shares in the profits of the firm
– More shirkers?? Less Production…so less
pay for monitor
Another way to ward off
shirking?
• Pay higher than equilibrium wages
• Decreases shirking because cost of losing
job is greater.
• Don’t need monitor because high wage
makes worker monitor themselves
• Called efficiency wage theory
Why do people submit to being
monitored??
• Monitoring decreases shirking
• Monitoring increases benefits of teamwork
• Monitoring maximizes benefits that can be
achieved
Objective of the firm
• Profit Maximization
• Now…want to move to the Firm to see
how they achieve this objective
Chapter
8
Production
and Costs
© South-Western College Publishing 1998
Cost Side
• Explicit Cost
– Actual money is exchanged
– COST
• Implicit Cost
– Value of resources used in the production
or acquisition of a good
– No monetary payment
– OPPORTUNITY COST
Sacrifice
• In order to have a cost, sacrifice must
have taken place
• Forfeited something else
• No money must change hands for sacrifice
to take place
Profit
• Two types
– Accounting
• Difference between total revenue and explicit
costs
• Acct Profit = TR – EXPLICIT COSTS
– Economic
• Difference between total revenue and total cost
(implicit and explicit)
• Econ Profit = TR – Explicit Cost – Implicit Cost
Which do you think is lower??
•
•
•
•
Economic Profit
Usually lower but never higher
How can it be “usually” lower?
Implicit cost can equal 0 so accounting
and economic profit would be equal
Accounting and Economic
Profit
To tal
Re ve nue
–
Explic it
Co s ts
= Accounting
Profit
(a)
Implic it
Co s ts
To tal
Re ve nue
–
(b)
Explic it
Co s ts
=
Ec o no mic
Pro fit
Zero Economic Profit
• Total Revenue-explicit cost-implicit costs =
0
• Also called NORMAL PROFIT
• Equilibrium of profit for the firm
• Would we want zero accounting profit?
• NO!!! Implicit costs would not be covered
Sunk versus Fixed Costs
• Sunk
– Incurred in the past
– Cannot be changed by a current decision
– Cannot be recovered
– Example: Time spent in school
– Can’t recover so let it go…Release it
• Fixed
– Possibility of recovering some money for selling
the good
– Example: Land, equipment…
Production
• Takes time to produce
• Costly to produce
• Direct link between production, costs,
and time
Two types of time
• Short Run
– Fixed and variable inputs
• Long Run
– All inputs are variable
Short Run
• Fixed input
– Quantity can not be changed
– Independent of output produced
– Example: Building, land…
• Variable input
– Quantity can be changed as output
changes
– Example: Labor
Costs
• Fixed Cost (FC)
– Associated with fixed inputs
– Do not change with output
– Example: Insurance premiums
• Variable Costs (VC)
– Associated with variable inputs
– Changes as output changes
– Example: Hire more people and must pay
more wages
(1)
QUANTITY
OF
OUTPUT, Q
(units )
(2)
TOTAL
FIXED
COS T
(TFC)
0
$100
1
100
2
100
3
100
4
100
5
100
6
100
7
100
8
100
9
100
10
100
Total
Fixed
Cost
TFC (do llars )
TFC
100
0
1 2 3 4 5 6 7 8 9 10
Q
(1)
QUANTITY
OF
OUTPUT, Q
(units )
(4)
TOTAL
VARIABLE
COS T (TVC)
Total
Variable
Cost
TVC (do llars )
500
0
$ 0
1
50
2
3
80
100
4
110
5
130
6
160
200
7
8
9
10
250
310
380
400
TVC
300
200
100
0
1 2 3 4 5 6 7 8 9 10
Q
Periods of Production, Inputs,
and Costs
Short Run
Long Run
INPUTS US ED
1. Fixed
2. Variable
INPUTS US ED
1. Variable
COSTS ASS OCIATED
WITH INPUTS
1. Fixed Co s ts
2. Variable Cos ts
COSTS ASS OCIATED
WITH INPUTS
1. Variable Co s ts
DEFINITION OF COSTS
1. Fixed Co s ts : Co s ts that
do no t c hange as
o utput c hange s .
2. Variable Co s ts : Cos ts that
c hang e as output c hange s .
DEFINITION OF COSTS
1. Variable Co s ts : Co s t
that c hange as
o utput c hange s .
Total Costs
• Variable Cost + Fixed Cost
TC  TVC  TFC
(1)
QUANTITY
OF
OUTPUT, Q
(units )
(6)
TOTAL COS T
(TC)
TC = TFC + TVC
= (2) + (4)
0
1
150.00
180.00
4
5
6
7
8
9
10
TC (do llars )
500
$100.00
2
3
Total
Cost
200.00
210.00
TC
400
300
200
100
230.00
260.00
300.00
350.00
410.00
480.00
0
1 2 3 4 5 6 7 8 9 10
Q
Other costs of importance…
• Average Variable Cost (AVC)
• Average Fixed Cost (AFC)
• Average Total Cost (ATC)
TVC
Q
TFC
Q
TC
Q
(1)
QUANTITY
OF
OUTPUT, Q
(units )
(5)
AVERAGE
VARIABLE
COS T (AVC)
AVC = TVC/Q
= (4)/(1)
Average
Variable
Cost
AVC (do llars )
0
1
2
$50.00
3
4
33.33
5
26.00
6
26.67
7
28.57
31.25
8
9
10
40.00
27.50
34.44
38.00
100
50
0
AVC
1 2 3 4 5 6 7 8 9 10
Q
(1)
QUANTITY
OF
OUTPUT, Q
(units )
(3)
AVERAGE
FIXED COS T
(AFC)
AFC = TFC/Q
= (2)/(1)
Average
Fixed
Cost
AFC (do llars )
0
1
2
$100.00
50.00
100
3
4
33.33
25.00
50
5
20.00
6
7
16.67
14.28
8
9
12.50
11.11
10
10.00
AF
0
1 2 3 4 5 6 7 8 9 10
Q
(1)
QUANTITY
OF
OUTPUT, Q
(un its )
(7)
AVERAGE
TOTAL COS T
(ATC)
ATC = TC/Q
= (6)/(1)
Average
Total
Cost
ATC (dollars)
150
0
1
2
3
4
$15 0.00
90.00
66.67
46.00
43.33
7
42.86
43.75
10
50
ATC
52.50
5
6
8
9
100
45.56
48.00
0
1 2 3 4 5 6 7 8 9 10
Q
Marginal Cost
• Change in TC that results from a change
in output
• Additional cost of producing an additional
unit of output
TC TVC
MC 
or
Q
Q
Why Change in Total Cost or
Total Variable Cost????
• Since total fixed cost doesn’t change the
“additional” total fixed cost is zero
(1)
(8)
QUANTITY MARGINAL COS T (MC)
OF
MC = TC/Q
OUTPUT, Q
= (6)/(1), o r
(un its )
= TVC/Q
= (4)/(1)
Marginal
Costs
MC (dollars)
0
1
$50 .00
2
30.00
3
20.00
4
10.00
5
20.00
6
30.00
7
40.00
8
50.00
9
60.00
10
70.00
100
MC
50
0
1 2 3 4 5 6 7 8 9 10
Q
In-class exercise #9
Using the knowledge
Shapes of Curves
• Law of diminishing marginal returns
– As larger amounts of a variable input are
combined with fixed inputs eventually the
Marginal Physical Product (MPP) declines
Marginal Physical Product
(MPP)
output Q
MPPl 

labor
L
What is the variable
input?
•
• What is the variable cost?
So…
• As more labor (VARIABLE INPUT) are
added to land (FIXED INPUT) the variable
inputs would yield smaller and smaller
additions to output
Marginal Physical Product
Part (a)
(1)
VARIABLE
INPUT,
LABOR
(wo rke rs )
(2)
FIXED
INPUT,
CAPITAL
(units )
(3)
QUANTITY OF
OUTPUT, Q
(units )
0
1
0
1
2
1
1
18
37
3
4
1
1
57
76
5
1
94
6
7
1
1
111
127
(4)
MARGINAL
PHYS ICAL
Marg inal Phys ic al Pro duc t
PRODUCT OF 20
VARIABLE
INPUT (units ) 19
(3)(1)
18
18
19
17
16
MP
20
19
18
17
16
0
1
2 3 4 5 6 7
Numbe r o f Wo rke rs
Crowding Problem
• The point at which MPP declines
• Shows the law of diminishing returns
Average Physical Productivity
• Output divided by Inputs (usually labor)
Q
APP 
L
• Good for comparing firms or countries.
So find that…
• MC and MPP are related
• What is the relationship?
 MPP  MC
 MPP  MC
Law of Diminishing Marginal
(2)
(3)Returns
(4)
(1)
VARIABLE
INPUT,
LABOR
(Wo rke rs )
FIXED
QUANTITY OF
INPUT,
OUTPUT, Q
CAPITAL (units )
(units )
0
1
0
1
1
18
2
1
37
3
4
1
1
57
76
5
1
94
6
1
111
7
1
127
8
9
1
1
137
133
10
1
125
MARGINAL PHYS ICAL
PRODUCT OF VARIABLE
INPUT (units )
(3)(1)
18
19
20
19
18
17
16
10
–4
–8
Marginal Cost
Part (b)
(5)
TOTAL
FIXED
COS T
(dollars )
(6)
TOTAL
VARIABLE
COS T
(do llars )
(7)
TOTAL
COS T
(do llars )
(5) + (6)
$40
$0
$40
40
20
60
40
40
80
40
60
100
40
80
120
40
100
140
40
120
160
40
140
180
(8)
Marg inal Co s t (do llars )
MARGINAL
COS T
(do llars )
1.25
(7)(3)
or
1.17
(6)(3)
1.11
$1.11
$1.05
MC
1.05
1.00
$1.00
$1.05
$1.11
$1.17
$1.25
0
18 37 57 76 94 111 127
Quantity o f Output
Does this relationship make
sense?
• Yes..
• If productivity increases what would
happen to costs??
– Decrease (MPP increase & MC decrease)
• Productivity decreases??
– Increase (MPP decreases & MC increases)
MPP determines shape of MC
• MPP must have a declining part because
of diminishing returns
• Can also define MC as:
wage
MC 
MPP
In-class exercise 11
How do we calculate these
costs??
Give two ways to get to the cost…
Average-Marginal Rule
• Can use to see what the ATC and AVC
curve look like
• Tells us what happens when MC is above
or below the “average” curves
• If MC is above AVC and ATC
– AVC and ATC are rising
• If MC is below AVC and ATC
– AVC and ATC are falling
From Average-Marginal Rule
can infer…
• MC intersects the AVC and ATC curves at
their MINIMUM POINTS
• Cannot infer anything about AFC
Average and Marginal Cost
Curves
Part (b)
Co s t
MC
ATC
L
Re g io n
1
0
Re g io n
2
Quantity o f Output
Average and Marginal Cost
Curves
Co s t
Part (a)
MC
AVC
L
Re g io n
1
0
Re g io n
2
Quantity o f Output
So…
• MC gains it shape from???
– MPP and law of diminishing marginal returns
• MC below ATC: What is ATC curve doing?
– Falling
• MC above ATC: What is ATC curve
doing?
– Rising
Average and Marginal Cost
Curves
Part (c )
Co s t
MC
ATC
AVC
AFC
0
Quantity o f Output
MC c urve c uts
bo th AVC and
ATC c urve s at
the ir re s pe c tive
lo w po ints .
Tying Products to Costs
A CLOSER LOOK
MPP
Variable Input
MC
When MC is below
ATC, AVC
Production in the
short run: at
least one fixed input
MPP
Variable Input
MC
When MC is above
ATC, AVC
Now switching to the Long Run
• When does Long Run start?
– As soon as all inputs (costs) are VARIABLE
– No fixed costs
• Important curves
– LRTC
– LRATC
– LRMC
Short Run vs. Long Run
• Short Run assumes FIXED plant size
• Each plant size has a unique ATC curve
associated with it
– SRATC
• LRATC combines all the SRATC curves
• Which points of the SRATC???
• Minimum points
Why minimum?
• LRATC shows the lowest average cost at
which a firm can produce any given level
of output
• LRATC is the lower ENVELOPE of the
SRATC curves
• Called envelope curve
Long-Run Average Total Cost Curve
(LRATC)
Part (a)
Ave rag e Co s t (do llars )
S RATC2
S RATC1
B
6
5
A
S RATC3
D
C
LRATC
(blue
c urve )
0
Q1
Q2
Quantity o f Output
Isn’t the LRATC curve smooth??
• Yes!!
• Have infinitely many SRATC curves so it
would be smooth if use all curves
• Each SRATC curve touches the LRATC
curve only once
Shape of LRATC
• U-shaped
• Decreasing, Flat, then Increasing
• Important when finding optimal long run
output level
Long-Run Average Total Cost Curve (LRATC)
Part (b)
Ave rag e Co s t (do llars )
S RATC7
S RATC1
S RATC6
S RATC2
S RATC5
S RATC3 S RATC
4
Ec o no mie s
o f S c ale
A
Co ns tant
Re turns
to S c ale
0
B
Dis e c o no mie s
o f S c ale
Quantity o f Output
Minimum
e ffic ie nt s c ale
LRATC
Economies of Scale
• Downward part of LRATC
• Average costs decrease as output
increases
• If have a 1% increase in input usage what
happens to output??
– Increases by MORE than 1%
• Specialization
Constant Returns to Scale
• Flat portion of LRATC
• Costs remain the same as increase output
• If have a 1% increase in input usage what
happens to output??
– Output increases by EXACTLY 1%
• First point of constant returns to scale is
called MINIMUM EFFICIENT SCALE
Diseconomies of Scale
• Upward sloped portion of LRATC
• Costs are rising as we increase output
• If have a 1% increase in input usage what
happens to output?
– Increases by LESS THAN 1%
• Why???
– Firm too large (bad communication or
coordination problems)
Long-Run Average Total Cost Curve (LRATC)
Part (b)
Ave rag e Co s t (do llars )
S RATC7
S RATC1
S RATC6
S RATC2
S RATC5
S RATC3 S RATC
4
Ec o no mie s
o f S c ale
A
Co ns tant
Re turns
to S c ale
0
B
Dis e c o no mie s
o f S c ale
Quantity o f Output
Minimum
e ffic ie nt s c ale
LRATC
Are economies, diseconomies, and
constant returns to scale in SR, LR, or
both???
• LONG RUN ONLY!!!
• Why?
– Inputs necessary for production are able to be
changed
– No fixed inputs
Is this the same as diminishing
returns?
• NO
• Diminishing returns is from using ONE
plant size intensely
– Short run
• Economies of scale is from CHANGING
plant size
– Long run
Review
• Economies of Scale
– LRATC falling
• Constant Returns to Scale
– LRATC flat
• Diseconomies of Scale
– LRATC rising
Why does economies of scale
exist?
• Large firms offer more opportunity for
workers to specialize
• Growing firms can take advantage of
efficient mass production techniques
– Smooth cost over more units produced
Why does diseconomies of
scale exist?
• Communication problems
• Shirking
• Management problems
Why is minimum efficient scale
important?
• Lowest output level at which ATC are
minimized
• Which has a cost advantage??
– Small firm at minimum efficient scale point
– Larger firm producing more output but still
within constant returns to scale area
– Neither
Long-Run Average Total Cost Curve (LRATC)
Part (b)
Ave rag e Co s t (do llars )
S RATC7
S RATC1
S RATC6
S RATC2
S RATC5
S RATC3 S RATC
4
Ec o no mie s
o f S c ale
A
Co ns tant
Re turns
to S c ale
0
B
Dis e c o no mie s
o f S c ale
Quantity o f Output
Minimum
e ffic ie nt s c ale
LRATC
Minimum Efficient Scale for Six Industries
INDUS TRY
Re frig e rato rs
Cig are tte s
Be e r bre wing
Petro le um refining
Paints
S ho e s
MES AS A
PERCENTAGE
OF U.S .
CONS UMPTION
14.1 %
6.6
3.4
1.9
1.4
0.2
S OURCE: F. M. S c he re r, Alan
Be c he ns te in, Eric h Kaufe r, and R. D.
Murphy, The Ec o no mic s o f Multiplant
Ope ratio n (Cambridg e , Mas s .: Harvard
Unive rs ity Pre s s , 1975), p. 80.
Where would you expect to find
less firms? (using MES)
• Firms with higher MES
• Why??
– Produce until MES
– If MES is higher then each firm will be producing
more…so need less firms to cover quantity wanted
by economy
• Many SHOE companies (MES = .2)
• Few REFRIGERATOR companies (MES = 14)
Efficient Number of Firms
• 100 divided by MES
• 100% of goods are wanted by consumers
• MES is the percentage of consumption each firm
will provide
• Cigarette firm’s MES = 6.6
– Need 15 firms
• Petroleum firm’s MES = 1.9
– Need 52 firms
• Thus a larger MES means less firms needed
What cause SRTC, LRTC, and
MC to shift?
• Taxes
– Does it affect FC??
• Only if it is a lump sum tax (tax for existing)
• If it is a per unit tax then FC doesn’t change
– How does it change curves??
• Input prices
– How does it change curves??
• Technology
– Either improves production process (use less
inputs) or lower input prices
– How does it change curves??
Homework due Monday May
19th
• Chapter 8
– Questions: 3, 5, 10, and 11
• Working with numbers and graphs
– Questions 3, 6, and 7
In-class exercise 12
Do we understand Chapter 8??
Chapter 10
MONOPOLY
Assumptions
• One seller
– Firm is the industry
• No substitutes for good
• Many barriers to entry
Government can “grant”
monopoly power in three ways…
• Public franchise
– Exclusive provider
• Power companies, water companies
• Patents
– Exclusive provider for 17 years
– Encourages people to invent new things
• Zantac, Tagament
• Licenses
– Must have to operate
• Cabs in New York City
Monopolies exist because:
• Legal mandate
– Government allows or doesn’t allow you to
operate
• Economic rational
– Natural Monopolies
• One firm can produce more efficiently than
many
– Exclusive ownership of resource to make
the good
Two types of Monopolies
• Government monopolies
– Legally protected from competition
• Market monopolies
– Protected from competition due to economies
of scale
Price maker
• Firm is the market
• Firm has some control over the price it
sets
• Law of Demand still hold
– Price increases leads to less quantity
demanded
Demand Curve
• Remember the individual firm is the
market
• What does the demand curve look like??
– Downward sloped
– Want to sell more must lower the price
Example
Price
Quantity
10
2
9.75
3
TR
MR
What differs here from Perfect
Competition??
• Price doesn’t equal MR!!!
– Price > MR
• Monopolist’s demand curve and marginal
revenue curves are DIFFERENT
• After the first point Marginal Revenue falls
twice as fast as Demand
Example
Price
10
Quantity
Deman
d
1
9
2
8
3
7
4
TR
MR
Demand and Marginal
Revenue Curves
Price or Marginal Revenue
For a monopolist,
the marginal
revenue curve
lies below the
demand curve.
MR
0
Quantity
D
Goal
• Profit Maximization
• What is the profit maximization rule?
– MR = MC
• Want to charge the highest price per unit
of quantity sold
Price
and Cost
Profit-maximizing
price (highest
price per unit at
which Q1 can be
sold).
MC
Monopolist'
s ProfitMaximizing
At Q1, P > MC Price and
Quantity of
Output
P1
MC1
MR = MC
MR
0
Q1
Profit-maximizing
quantity of output
D
Quantity
Three cases
• P > ATC
• P < ATC
• P=ATC
• Where is AVC??
– Since monopoly is the industry no need to segment
total cost
– If suffer a loss can just increase prices to cover the
loss
Monopoly Profits and Losses
Price
Price
MC
MC
ATC
B
C
B
P1
PROFITS
C
ATC
LOSSES
P1
A
A
D
D
MR
0
Quantity
Q1
(a) Monopoly Profits
MR
0
Quantity
Q1
(b) Monopoly Losses
Differences between monopoly
and perfect competition
• P = MR for perfect competition but P > MR
for monopoly
• P = MC for perfect competition but P > MC
for monopoly
• Monopolist can change prices
Similarities
• Both try to maximize profits
• Both are constrained by their demand
curves
• Both equate MR and MC
Long Run Profits
• Perfect Competition
– Zero Economic Profit (normal profit)
• Monopoly
– No entry
– Profits can be reduced in two ways
• Capitalization of profits
• Monopoly rent seeking
Capitalization of Profits
• Firm owner eventually may sell the
business
• When sell…include profits into the price
– Include in TFC
• New owner will face a higher ATC than
previous owner
– Includes old owner’s profits
• Increase in ATC eliminates profit for
new owner
Capitalization
of
Profits
Price
MC
ATC (new owners
of monopoly)
Profits of
former owners
of monopoly
firm.
B
P1
PROFITS
C
ATC (former owners
of monopoly)
A
D
MR
0
Q1
Quantity
Economic Rent
• Profits that can’t be reduced by new
entrants
• Payment in excess of opportunity cost
(profit)
• May bring about Rent Seekers
– Try to find markets that can gain monopoly
status
– Time and resources expended to try to get
monopoly reduces economic rent
Monopolies are inefficient
compared to Perfect
Competition
• Welfare cost of monopoly
– Lower levels of output produced with
monopoly than perfect competition
– Perfect competition produce where P=MC
– Monopoly produce where MR=MC and P >
MC
– Welfare cost is about 1% of total output
• Rent seeking is socially wasteful
– Use resources not in production but to gain
Welfare Cost and Rent
SeekingPrice
as Social Costs of
Monopoly
Monopoly profits
subject to
socially wasteful
rent seeking
C
PM
PC
Welfare cost triangle
A
MC = ATC
B
D
MR
0
QM
QC
Quantity
X-inefficiency
• Monopoly has no competition
• No incentive to operate at lowest cost
Does monopolist have to charge
same price to everyone?
• No!!
• Called Price Discrimination
• Three types
– First degree (perfect price discrimination)
– Second degree (bulk pricing)
– Third degree (group pricing)
Perfect Price discrimination
• Highest price willing and able to pay is
charged to each person
• Price determined by placement on
demand curve
• Discrimination among units
– Ex. Schools
Bulk Pricing
• Different prices for different quantities sold
• Discrimination among quantities
• Ex. costco
Group Pricing
• Different prices for different segments of
the market
• Ex. Senior citizen discounts, coupons,
different seats in movie or plane…
Why Price Discriminate?
• To gain some of the consumer surplus lost
when charge everyone the same price
• If successfully perfectly price discriminate
– P=MR for all units sold
– MR and TR increase
– Eliminate consumer surplus
Why doesn’t everyone price
discriminate?
• Seller must be a price maker
• Seller must know each consumer’s
willingness to pay
• Must be impossible for consumers to resell
to others
– Arbitrage
– Buy for a low price and sell at a higher price
Does a monopolist exhibit
resource allocative efficiency?
• Perfect competition does!!
– P = MC
• Monopolist doesn’t!!
– P > MC
• Perfectly Price Discriminating Monopolist
does!!
– P = MC
Comparing P. C. Firm, Single-Price Monopolist, &
Perfectly Price-Discriminating Monopolist
Price
Price
MC
Price
MC
PM
PC
d, MR
P > MC
MC
PPD
P = MC
P = MC
D, MR
D
MR
0
qC
Quantity
(a)
Perfectly
Competitive Firm
0
0
QM
Quantity
(b)
Single-Price
Monopolist
QPD
Quantity
(c)
Perfectly
Price-Discriminating
Monopolist
So does one person paying high
prices mean that another can pay
low prices??
• No!!
• Perfect Price Discrimination means that
each person pays the highest price they
are willing and able to pay
Would firms rather be a
monopoly?
• Yes!!
• Rent seekers try to “buy” monopoly
positions.
• Why?
– Fewer constraints on production behavior
– Ability to charge different prices to different
segments of the population