Question

A small town is served by many competing supermarkets, which all have the same constant marginal cost. Use the black point (plus symbol) to show the competitive price and quantity in this market. Then use the green area (triangle symbol) to shade the area representing consumer surplus in the market for groceries, and use the purple area (diamond symbol) to shade the area representing producer surplus. Now suppose that the independent supermarkets combine into one chain. Use the black point (plus symbol) to show the profit-maximizing monopoly outcome. Then use the green area (triangle symbol) to shade the area representing consumer surplus in the market for groceries, and use the purple area (diamond symbol) to shade the area representing producer surplus. Finally, use the black area (plus symbol) to shade the area representing deadweight loss.

Answer 1

It is given that the markets are perfectly competitive. The optimum outcome is where the marginal cost is equal to demand of the commodity. Consumer surplus is the difference between the willingness to pay and the actual price. In graphical terms, it is the area above the price line and below the demand curve. Similarly producer surplus is the difference between willingness to pay and the actual price. In graphical terms, it is the area above the supply curve and below the price line. The graphbelow shows the optimum output produced, consumer surplus and producer ufplus Demand CS Marginal Cost Qc Quantity of Groceries The optimum output is Qc at price equals P. Green colored area shows consumer surplus and no producer surplus

Now suppose the market is combines into one chain and behaving like monopolist. The profit-maximizing level of outputis where the marginal revenue is exactly equal to marginal cost. The graphbelow shows the optimum output produced, consumer surplus, producer surplus and deadweight loss: Demand CS PS DWL Marginal Cost Fir 0 Marginal Revenue Q Quantity of Groceries The optimum or profit-maximizing level of output is QM at price equals P. green colored area shows consumer surplus, purple colored area shows producer surplus and grey colored area shows deadweight loss