The following figure depicts a generalized downward-sloping market demand (D)curve for a product.It also shows the firm's relevant marginal revenue (MR)curve and marginal cost (MC)curve.Use this figure to answer the following questions:

-If the firm moves from a perfect competition model to a monopolist model that charges a single price of $6,there would be ________ in total welfare.
A) a loss of $160
B) a gain of $80
C) a loss of $40
D) a gain of $120
E) no change

Question

The following figure depicts a generalized downward-sloping market demand (D)curve for a product.It also shows the firm's relevant marginal revenue (MR)curve and marginal cost (MC)curve.Use this figure to answer the following questions:
 
-If the firm moves from a perfect competition model to a monopolist model that charges a single price of $6,there would be ________ in total welfare.
A) a loss of $160 
B) a gain of $80 
C) a loss of $40 
D) a gain of $120 
E) no change

Quizplus · Accepted Answer

Under perfect competition, the market produces where MC = P, which occurs at point A in the graph. The price is $4 and the quantity is 40. The total welfare (consumer surplus + producer surplus) is the area between the demand curve and the MC curve from zero quantity to 40 units, which is represented by the triangle ABE. The total welfare is $160.

If the firm becomes a monopolist and charges a single price of $6, the quantity demanded will decrease to 30 units, where MR = MC, as shown by point C. The total welfare is now the area between the demand curve and the MC curve from zero quantity to 30 units, which is represented by the triangle DCE. The total welfare is $120.

Therefore, the total welfare decreases by $40 when the firm moves from perfect competition to a monopolist model that charges a single price of $6, making the correct answer C.

The Following Figure Depicts a Generalized Downward-Sloping Market Demand (D)curve