Suppose a monopolist facing a downward sloping inverse demand curve p(q) sets prices and quantity (p...

Suppose a monopolist facing a downward sloping inverse demand curve p(q) sets prices and quantity (p ∗ , q∗ ). Show that the area between the demand curve and the marginal revenue curve equals the consumer surplus.

Expert Solution

Consumer surplus is defined as the area which lies above the equilibrium price and below the demand curve.

The monopolist profit maximizing condition is set by where MC=MR

This is shown by the graph below:

The will set P=P* and Quantity at Q* where its MC curve intersects MR curve.

Rahul Sunny answered 2 years ago

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