Question

1. Draw the graph of a profit maximizing monopoly. Be sure to include demand, marginal cost, marginal revenue, the price the monopoly charges and the quantity it sells.
   1. Indicate where on this graph the socially efficient production and price would be.

2. Indicate on this graph the deadweight loss. Why is there deadweight loss in a monopoly?

Answer 1

The attached image shows the profit maximization by the monopoly. It maximises its profit where its marginal cost is equal to the marginal revenue. This point determines the profit maximizing quantity of the monopolist. On the other hand, the profit maximizing price of the monopolist is shown by the corresponding point on the demand curve (or average revenue curve).

i. The socially efficient quantity and price are attained where the marginal cost of the monopolist becomes equal to the average revenue.

ii. Deadweight loss is marked in the diagram. There is a dead weight loss in the monopoly because a monopolist does not produce the socially optimal output level. Monopolist is a price maker, hence he does not produce where average revenue is equal to MC when he can produce at a point where he can earn more profit by producing lesser quantity of output.