Suppose a profit-maximizing monopolist faces a constant marginal cost of $20, produces an output level of 100 units, and charges a price of $50. The socially efficient level of output is 200 units. Assume that the demand curve and marginal revenue curve are the typical downward-sloping straight lines. The monopoly deadweight loss equals $1,500.

Question

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The deadweight loss (DWL) in a monopoly can be calculated as the area of the triangle formed by the marginal cost (MC), the demand curve, and the quantity axis between the monopolist's quantity (Qm) and the socially efficient quantity (Qe). Given the MC = $20, Qm = 100 units, Qe = 200 units, and the price at Qm = $50, the height of the triangle is the price difference between the demand curve at Qe and the MC, which is $30 ($50 - $20). The base of the triangle is the difference in quantities (Qe - Qm = 100 units). The area of this triangle, representing the DWL, is 0.5 * base * height = 0.5 * 100 * 30 = $1,500.

Suppose a Profit-Maximizing Monopolist Faces a Constant Marginal Cost of $20