Question 15

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Any profit-maximizing firm will produce the output where MR = MC; this firm will produce 50 million units. The demand price (what consumers are willing and able to pay) for this level of output is $45. Profit is calculated by taking the difference between total revenue and total cost. In this case, calculate: (P x output) – (ATC x output) = ($45 x 50) – ($30 x 50) = $2250 – $1500 = $750 million.

When a monopolist is able to perfectly price discriminate, it captures the entire consumer surplus. Recall that consumer surplus is the triangular area below the demand curve but above price. In this case, consumer surplus is (½) (b) (h), or (1/2) (100) (60 – 30) = $1500 million.

Under perfect competition, the output produced is where P = MC. Here, P = MC at $30, and the corresponding output is 100 million. Profit is total revenue (P x output) minus total cost (ATC x output), but since P = ATC, total revenue and total cost are the same, resulting in zero profit.

Deadweight loss is the reduction in total surplus due to the monopoly; output decreases and price increases. It can be calculated by finding the area of the triangle with a base equal to the competitive output minus the monopoly output, and a height equal to the monopoly price minus the competitive price. Here, the base equals 100 – 50 = 50, and the height equals $45 – $30 = $15. Thus, the deadweight loss is (½) (b) (h) = ½(50)($15) = $375.