Question

Kyra makes and sells picnic lunches to people taking all-day rafting trips on the river. The marginal cost and average total cost of each lunch are constant at $4. Use the table below to answer the following questions. Price Quantity Demanded $ 100 10 20 $6 40 2. If Kyra is one of many firms in a competitive market, what is consumer surplus? a. $4 b. $10 C. $180 d. $360 3. Now assume Kyra is the only seller in the market, what is consumer surplus? $45 b. $90 C. $180 d. $360 4. Again, Kyra is the only seller in the market, what is the deadweight loss? $45 b. $90 c. $180 d. $360

Answer 1

2. $180

Reason: A perfectly competitive firm produces at the point P = MC

Since MC is $4, then price wil be $4 and sales will be 60

Consumer surplus = (1/2)(60)(10-4) = 180

3. $45

Reason: A monopolist sells at the point MR = MC

This takes place at P = $7 and Q = 30

At this point MR is 5 and close to MC of $4

Increasing output beyond this point reduces MR and thus leads to losses

Consumer surplus = (1/2)(7-4)(30) = 45

4. $45

Reason: Dead weight loss = (1/2)(7-4)(60-30) = 45