The figure above shows the profit-maximizing output of a monopolist (compared to

Question

The figure above shows the profit-maximizing output of a monopolist (compared to a purely competitive industry with an LRS curve the same as the MC=AC line) who faces constant average and marginal costs.

1. Refer to figure. What is the deadweight loss as a result of the monopolist’s market power in contrast to pure competition?

2. Refer to the figure above. If the firm were operating in a perfectly competitive market, the equilibrium quantity would be __.

3. Refer to figure. When the firm operates as a profit-maximizing monopolist as compared to a perfectly competitive firm, consumer surplus changes by __.

Note: A minus sign denotes a decrease. A plus sign denotes an increase

4. Refer to figure. When the firm operates as a profit-maximizing monopolist as compared to a perfectly competitive firm, producer surplus changes by _____. (Negative signs refers to decreases. Positive signs refer to increases.)

Note: Producer surplus is only zero when the industry is in long-run competitive equilibrium

Explanation / Answer

(1) Perfect competitor maximizes profit at intersection of D & MC curves (at point C), producing Q units at price of P. A monopolist maximizes profit at intersection of MR & MC curves (at point B), producing Q'' units at price of P''.

Deadweight loss = (1/2) x (P'' - P) x (Q - Q'') = Area CFG

(2) If firm were perfectly competitive, output = Q units

(3) Consumer surplus (CS) = Area between demand curve & equilibrium price.

Change in CS = - PCAP''

(4) Producer surplus (PS) = Area between supply curve (MC) & equilibrium price.

Change in PS = PBAP''

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