Scenario 10.9:
Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows:
P = 360 - 4Q MR = 360 - 8Q MC = 4Q
-Refer to Scenario 10.9. At the profit maximizing level of output, what is the deadweight loss?

Question

Quizplus · Accepted Answer

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.

Scenario 10.9: Maui Macadamia Inc. Has a Monopoly in the Macadamia Nut