The following graph shows Sparkle\'s demand curve, marginal-revenue (MR) curve,

Question

The following graph shows Sparkle's demand curve, marginal-revenue (MR) curve, average-total-cost (ATC) curve, marginal-cost (MC) curve, and profit-maximizing output and price TC ID MR Quantity of Sparkle Toothpaste Indicate which of the labeled areas represent consumer surplus derived from the purchase of Sparkle toothpaste or deadweight loss relative to the efficient level of output Consumer SurplusO Deadweight Loss Suppose the government required Sparkle to produce the efficient level of output. Which of the following describes what would happen to the firm and Sparkle's customers? O Sparkle would earn negative profit, forcing it to shut down, and Sparkle's customers would gain no consumer surplus O Sparkle would earn zero profit, and its customers would be just as well off as before O Sparkdle would earn positive profit and increase production, boosting consumer surplus

Explanation / Answer

Consumer surplus is area of triangle between maximum willingness to pay and price per unit quantity. It is sum of area A and B.

Dead weight loss = Area D.

A. Negative profit.

Efficient production is at minimum average cost and at that point average cost is more than price and hence negative profits. Due to negative profit, firm shutdown.

A firm maximises profit where marginal revenue is same as marginal cost i.e. point E. Profit is incurred if price is more than average total cost.

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