Question

1) (25 points) Suppose that market demand for a good is given by Q”(P) - 10-P. The total cost of production is TCQ) = 20%. Determine quantity QM and price pM that a monopolist will choose in this market. Calculate consumer surplus (CS), producer surplus (PS), and the deadweight loss (DWL) resulting from the monopoly. Graphical Solution would suffice!

Suppose that market demand for a good is given by Q^D(P) = 10−P. The total cost of production is TC(Q) = 2Q². Determine quantity Q^M and price P^M that a monopolist will choose in this market. Calculate consumer surplus (CS), producer surplus (PS), and the deadweight loss (DWL) resulting from the monopoly. Graphical Solution would suffice!

Answer 1

Answer

For a monopolist, equilibrium condition is given by-

MARGINAL REVENUE = MARGINAL COST

STEP-1 Calculate Marginal revenue

MR= dTR/dQ = 10-2q

STEP-2 Calculate Marginal Cost

MC = dTC/dQ = 4Q

STEP-3 FINDING EQUILIBRIUM PRICE AND QUANTITY

Q* = 5/3

P* = 25/3

STEP-4 CALCULATING CONSUMER SURPLUS, PRODUCER SURPLUS AND DEADWEIGHT LOSS

Consumer surplus can be defined as the difference between the total amount that a consumer is willing to pay for a good and the amount he actually pays for it.

As we know, monopoly charges a higher price than what would prevail in a perfectly competitive economy, such practice leads to a loss of both consumer surplus and producer surplus. Such a loss is a welfare cost to the society and known as deadweight loss.