Question

Examine the graph below, which belong to a monopolist, and then answer the questions that follow: Price 250 170 150 110 90 MC Demand MR 100 125 175 200 a. What is the monopoly profit maximizing price and quantity? i. Price: ii. Quantity: b. What is the perfectly competitive price and quantity? i. Price: ii. Quantity:

Answer 1

Price 250 B 170 150 110 с 90 MC A Demand MR 100 125 175 200 Q

a.

Monopolist set quantity where: MR=MC. This condition satisfies at point A. At which Quantity is 100 and along demand curve at point B, Price= 170.

i) Price=170

ii) Quantity= 100

b.

In perfect competition, optimal condition is where Price=MC. In above graph this condition satisfies at point C.

i) Price= 90

ii) Quantity= 200

c.

Producer surplus is the area above MC and below equilibrium price.

Producer surplus= (170-90)(100)= 8000

Consumer surplus is the area below demand curve and above equilibrium price:

Consumer surplus= (1/2)(250-170)(100)= 4000

Total surplus= Producer surplus + Consumer surplus

Total surplus= 8000+4000= 12000

d.

Producer surplus= as price and MC are equal= 0

Consumer surplus = (1/2) (250-90)(200)= 16000

Total surplus= 16000

e.

Deadweight loss is the decrease in total surplus when market transforms from perfect competition to monopoly.

Here in above graph area ABC is deadweight loss.

Decrease in deadweight loss= 16000-12000= 4000