1. A market has linear market MC (might be supply) and demand curves. No one wil

Question

1. A market has linear market MC (might be supply) and demand curves. No one will buy the good if the price is above $200 and the firm will not produce the good if the price is below $20. The equilibrium price and quantity if this market is perfectly competitive would be $164 at a quantity of 36.

a) Calculate the consumer surplus and producer surplus if this is a perfectly competitive market.

b) Calculate the price and output for a monopoly. Put the price and quantity for both the competitive equilibrium and the monopoly in the diagram and indicate the welfare loss (or social cost or excess burden) of the monopoly in the diagram.

c) What number would you need that you were not previously asked to calculate to find the exact the area of the welfare loss of the monopoly? Find it and calculate the loss.

d) Now we will make the monopolist a perfect price discriminator. If the price in the Comp. equil. given above is a LRCE, and there are no economies of scale when the firms are merged, then find the total revenue and profit of a perfect price discriminating monopolist.

Explanation / Answer

1. a. Demand curve is downwards sloping. Consumer surplus(CS) is the difference between the willingness of a consumer to pay and he actually pays. So that it is the area below the demand curve. Hence, for a linear difference curve the area of triangle is CS and it is;

1/2x(200-164)x36=648 ;Maximum price is $200, beyond which he will not pay and equilibrium price=$164

Similarly, producer surplus(PS) is the difference between the revenue that prodcer gets and he the price in which he actually wants to sell. So it is the area over and above the supply curve. The area;

=1/2x164x36=2952

b. Monopoly equilibrium requires MR=MC

Say, equilibrium price and output is p*, q*

So dead weight loss will be=1/2x(36-q*)x(p*-164)

c. p*, q* should have numeric values to calculate it.

d. Since cost of monopolist is unknown profit cannot be derived.

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