Question

Consider a profit-maximizing monopoly pricing under the following conditions. The profit-maximizing quantity is 40 units, the profit-maximizing price is $160, and the marginal cost of the 40th unit is $120. If the good were produced in a perfectly competitive market, the equilibrium quantity would be 50, and the equilibrium price would be $150. The demand curve and marginal cost curves are linear. What is the value of the deadweight loss created by the monopolist?

Answer 1

Answer:

The dead weight loss will be equal to 200.

Explanation:

Deadweight loss refers to the loss in surplus when the production is not taking place efficiently. A monopolist produces less than socially optimal level of output and charges a higher price. This causes a loss of consumer surplus.  

Dead Weight loss  

= Area of the triangle marked by a difference in Quantity under 2 situations and Price under monopoly and equality point of MR-MC

= $( \frac{1}{2}\ \times\ Difference\ in\ Price\ \times Difference\ in\ Quantity)$

= $( \frac{1}{2}\ \times\ (160 - 120)\ \times\ (50-40)$

=$( \frac{1}{2}\ \times\ 40\ \times\ 10)$

= 200