Figure: Demand and Marginal Revenue (Figure: Demand and Marginal Revenue) The figure Demand and Marginal Revenue refers to a software upgrade.The producer incurred fixed costs of $10 million to produce the upgrade; the marginal cost of allowing consumers to download the upgrade is zero.What is the deadweight loss associated with the profit-maximizing price and quantity of the upgrade?

Question

Figure: Demand and Marginal Revenue   (Figure: Demand and Marginal Revenue) The figure Demand and Marginal Revenue refers to a software upgrade.The producer incurred fixed costs of $10 million to produce the upgrade; the marginal cost of allowing consumers to download the upgrade is zero.What is the deadweight loss associated with the profit-maximizing price and quantity of the upgrade?

Quizplus · Accepted Answer

The profit-maximizing price and quantity are where marginal revenue equals marginal cost, which is at a price of $12 and a quantity of 4 million downloads. However, this results in a quantity demanded of only 3 million downloads, causing a deadweight loss of 1 million downloads. The deadweight loss is calculated as the area of the triangle between the demand curve and the marginal cost curve, which is (1/2) x (9-8) x (12-0) = $3.125 million. Therefore, the answer is C.