Question

Please explain why! I am studying :)

31. Consider a profit-maximizing monopoly pricing under the following conditions. The profit-maximizing quantity is 40 units, the profit-maximizing price is $200, and the marginal cost of the 40th unit is $120. If the good were produced in a perfectly competitive market, the equilibrium quantity would be 50, and the equilibrium price would be $150. The demand curve and marginal cost curves are linear. What is the value of the deadweight loss created by the monopolist?

	a.	$40
	b.	$100
	c.	$200
	d.	$400

Answer 1

For better understanding the information given in the question is shown In the above diagram the horizontal axis represents the quantity and the vertical axis represent the cost and revenue.

The demand curve (AR) and Marginal cost curve (MC) are linear.

The profit maximising price of the monopoly is =$200

The profit maximising quantity of the monopoly is = 40units

The monopoly maximises profit, where MC=MR and MC intersects MR from its below. This condition is satisfied at the point B in the diagram

At profit maximising quantity of 40 units the MC=MR=$120

If the same quantity of output is produced in perfect competition, then equilibrium quantity is 50

The equilibrium level of output in perfect competition is where MC=MR and MC intersects MR from its below , (in perfect competition AR=MR) This condition is satisfied at the point A in the diagram

Because in prefect completion the AR= MC=50units

The equilibrium price Pc=$150

Deadweight loss is the loss of economic welfare due to market imperfection. In prefect competition there is no scope of Deadweight loss because the market is perfectly operate but in monopoly there arises deadweight loss because in order to maximise profit the monopolist sets the price above the marginal cost(MC). The deadweight loss is shown in the diagram in the area ABC

Deadweight loss = 0.5x(200-120)x(50-40)=0.5x80x10=$400

The deadweight loss created by the monopolist is = $400      (Answer Option-D $400)