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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?
A) $0
B) $1.25 million
C) $3.125 million
D) $6.25 million

Question

Use the following to answer questions:
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?
A) $0 
B) $1.25 million 
C) $3.125 million 
D) $6.25 million

Quizplus · Accepted Answer

The deadweight loss is calculated as the area of the triangle formed between the demand curve and the marginal cost curve (which is zero) from the profit-maximizing quantity to the socially optimal quantity. Given the fixed costs and zero marginal cost, the deadweight loss is $3.125 million.

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