Question

2. Consider a market where demand is given by Q = 60 – P and the marginal cost for every firm is $15. a. Assume the market is perfectly competitive. Find equilibrium price and quantity. Calculate consumer surplus, producer surplus, total surplus, and deadweight loss. b. Now assume that there is only one supplier in the market. Find equilibrium price and quantity. Calculate consumer surplus, producer surplus, total surplus, and deadweight loss. Is total surplus higher or lower compared to (a)? Why?

Answer 1

Solution 2 The market demand is quen by : a = 60-P The marginal cost is is. Under poyect competition at Equilibrium : Peme .:. P = 15 - 60 - P = 60-15 = 45 At Equilibrium : P-15 = 45 --=456 Q-15 Consumer Surplus is gause the area below the demand curre and above the puce line es a area of ABC. = £ x 160-15) x 45 = 1012.5 Producer Surplus is the area below the price line and above the supply chance here marginal cost Curse is the Supply Curre to decor and Pa me . Producer Surplus is o. Ps zo Total sweep us is the sum of Consumen and producer Surplus te IS z cst ps = 10 12.5+0 =1010.5 are there is no . dead weight loss and the entire Swplus is extracted by the consumers Ans'; p = 15, Q = 45 CS - 1012.5, PS 2 0 do T8 = 1012-5 deadweight loss =0 . w Now if there is only seller in the market, then in market is a monopoly and here equilibrium Is a wen by the condition : Marginal sentonite MR NIC - Marginal revenue (MR) a = mama al cost (MC) mano The demand come is : Q=60-p af p = 60-Q. Scan Total gemone (TR) => TR = QXP-60- CamScanner TR = 604-02

MR = OTR = 60-22 AL At Equilibrium : MR-MC =60-22=15422.5 P = 60-4 = 37.5 P Zol -P-37.316 1510 Mt Q=22-5 30 45 60 Consumer Surplus = area of ABC = 1 x (60-37.5) × 22.5 CS = 253.125 Producer Surplus is the area below the puce and above 'the supply I'Me) curul .. Ps = area of BCDE - (37.5-15) x 22.5.506-25 Total Swoulul => TS = CS +PS - 2.53.125 + 506.25 15 - 759.375. Here there is a dead weight loss quen by the area of the triangle DEF. Deadweight loss is the sumples that is neither received by the consumers on the producers Dead weight loss = area of briangle cef dead wey at 1085 LX 137.5-15)x145-22.5) slead weight loss = 253.125 Ateinatinely, dead weuput Loss - Total Surplus Peyeet competion) - Total swepte (Monopoly) dead wel het losse 10.12.5-24 5000 759.375-253.125 Ans; 7 = 37.5, 8 - 22.5 , (S = 253.125, P5=7541375 ned wps = 506 25 TS - 75 9.375, dead wh lass=253.195 L

Total sweptes Under monopoly is 759.375 & total surplus Under perfect competition is 1012.5, :. Total surplus Under monopoly is lower because the monopo ust charges a pruce his her than its marginal Cost & therefore a dead weight loss is generated. Here Consumer pay a high price so there is loss of consumer Suaplus, producers receive a high price so there is gain in producer Surpluis. Howenen the loss in Consumer Surplus exceeds the gain in producer Surplus and this there is a deadweght loss which results in a reduction in total Suupus. Ics Scanned with Cascanner