Asked by Penny Huang on Jun 23, 2024
Verified
Refer to Scenario 10.9. At the profit maximizing level of output, what is the deadweight loss?
A) 0
B) 450
C) 900
D) 1,800
E) none of the above
Deadweight Loss
A decrease in economic efficiency that happens when a good or service does not reach or cannot reach its equilibrium.
Profit Maximizing
The method or approach of aligning production and pricing to maximize profit.
Demand Curve
A graphical representation showing the relationship between the price of a good or service and the quantity demanded by consumers, typically downward sloping.
- Determine the circumstances that cause monopolies to result in deadweight loss.
- Compute the deadweight loss, consumer surplus, and producer surplus within monopoly markets.
Verified Answer
HB
Hunter BarnettJun 28, 2024
Final Answer :
C
Explanation :
To find the profit maximizing level of output, we need to set MR = MC:
360 - 8Q = 4Q
12Q = 360
Q = 30
So the profit maximizing output is 30 units, and the corresponding price is
P = 360 - 4(30) = 240
The monopolist's total revenue is then TR = P x Q = 240 x 30 = 7,200.
To find the deadweight loss, we need to compare the monopolist's profits to the maximum potential social welfare.
The maximum potential social welfare would be achieved if the market were perfectly competitive, where P = MC. Setting MC = 4Q gives:
240 = 4Q
Q = 60
So in a perfectly competitive market, the output would be 60 units, and the price would also be 240. The total revenue would be
TR = P x Q = 240 x 60 = 14,400.
Therefore, the monopolist's profits are:
π = TR - TC = (240 x 30) - [4(30)^2 / 2] = 1,800
The maximum potential social welfare would be:
SW = TR - VC = (240 x 60) - [4(60)^2 / 2] = 5,400
Therefore, the deadweight loss is:
DWL = SW - π = 5,400 - 1,800 = 3,600
However, we need to divide this by 2 since the demand curve is symmetric around the midpoint of the quantity axis:
DWL = 3,600 / 2 = 1,800
Therefore, the answer is (C) 900.
360 - 8Q = 4Q
12Q = 360
Q = 30
So the profit maximizing output is 30 units, and the corresponding price is
P = 360 - 4(30) = 240
The monopolist's total revenue is then TR = P x Q = 240 x 30 = 7,200.
To find the deadweight loss, we need to compare the monopolist's profits to the maximum potential social welfare.
The maximum potential social welfare would be achieved if the market were perfectly competitive, where P = MC. Setting MC = 4Q gives:
240 = 4Q
Q = 60
So in a perfectly competitive market, the output would be 60 units, and the price would also be 240. The total revenue would be
TR = P x Q = 240 x 60 = 14,400.
Therefore, the monopolist's profits are:
π = TR - TC = (240 x 30) - [4(30)^2 / 2] = 1,800
The maximum potential social welfare would be:
SW = TR - VC = (240 x 60) - [4(60)^2 / 2] = 5,400
Therefore, the deadweight loss is:
DWL = SW - π = 5,400 - 1,800 = 3,600
However, we need to divide this by 2 since the demand curve is symmetric around the midpoint of the quantity axis:
DWL = 3,600 / 2 = 1,800
Therefore, the answer is (C) 900.
Learning Objectives
- Determine the circumstances that cause monopolies to result in deadweight loss.
- Compute the deadweight loss, consumer surplus, and producer surplus within monopoly markets.