A group of firms in competitive market produced 20 units of a good when the market price was $2.They incurred no marginal cost.Eventually they realized the benefits they could get by teaming up and acting as a monopolist.The following figure shows the demand curve and marginal revenue curve for this profit maximizing monopolist.

-Refer to Figure .Calculate the deadweight loss in this market caused by monopoly.

Question

A group of firms in competitive market produced 20 units of a good when the market price was $2.They incurred no marginal cost.Eventually they realized the benefits they could get by teaming up and acting as a monopolist.The following figure shows the demand curve and marginal revenue curve for this profit maximizing monopolist.

-Refer to Figure .Calculate the deadweight loss in this market caused by monopoly.

Quizplus · Accepted Answer

Deadweight loss is calculated by finding the area of the triangle formed by the points where the demand curve and marginal cost curve intersect, the point where the demand curve intersects with the monopolist’s marginal revenue curve and the monopolist's quantity. Using the graph provided in Figure 6-2, the deadweight loss is calculated as:

DWL = (3 - 2) x (20 - 10) / 2
DWL = $10

Since the monopolist produces 10 units of the good, the market price is $3, and the competitive price is $2. Therefore, the deadweight loss caused by a monopoly is $40 ($10 x 4). Therefore, the correct answer is C) $40.

A Group of Firms in Competitive Market Produced 20 Units