Suppose the demand curve for steel is Q = 100

Question

Suppose the demand curve for steel is Q = 100 - P, where P is the price per unit of steel and Q measures millions of units of steel. The private marginal cost of producing steel is MC = 5Q + 40, while the external marginal cost of producing steel is $12. In a perfectly competitive steel industry, the deadweight loss is:
A) $12 million.
B) $2 million.
C) $750,000.
D) $200,000.

Quizplus · Accepted Answer

The deadweight loss is the difference between the social cost and the private cost of production. The social cost is the sum of the private cost and the external cost. In this case, the private cost is MC = 5Q + 40, and the external cost is $12. The social cost is therefore MC + 12 = 5Q + 52. The deadweight loss is the difference between the social cost and the private cost, which is (5Q + 52) - (5Q + 40) = $12. The deadweight loss is therefore $12 million.