Use the following to answer question:
Figure: PPV
-(Figure: PPV)Use Figure: PPV.The figure shows the demand and marginal revenue for a pay-per-view football game on cable TV.Assume that the marginal cost and average cost are a constant $20.If the cable company is a monopoly,how much producer surplus is there when the monopolist maximizes profit?
A)$0
B)$20
C)$80
D)$160

Question

Use the following to answer question:
Figure: PPV 
-(Figure: PPV)Use Figure: PPV.The figure shows the demand and marginal revenue for a pay-per-view football game on cable TV.Assume that the marginal cost and average cost are a constant $20.If the cable company is a monopoly,how much producer surplus is there when the monopolist maximizes profit?
A)$0 
B)$20 
C)$80 
D)$160

Quizplus · Accepted Answer

Producer surplus is the difference between the price received by the monopolist and the cost of production. Since the marginal cost and average cost are constant at $20, the monopolist will produce the quantity where marginal revenue equals $20 (the intersection of MR and MC curves). This occurs at a price of $60 (the intersection of the demand curve and the MR curve). Therefore, the producer surplus is the area between the marginal cost curve and the price line from a quantity of 2 to a quantity of 6:

Producer surplus = (1/2) x (60-20) x (6-2) = $160

Therefore, the correct choice is D.

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