The following figure shows the market demand curve for penicillin, an antibiotic medicine. Initially, the market was supplied by perfectly competitive firms. Later, the government granted the exclusive right to produce and sell penicillin to one firm. The figure also shows the marginal revenue curve (MR) of the firm once it begins to operate as a monopoly. The marginal cost is constant at $3, irrespective of the market structure.

-Refer to the figure above.What is the change in consumer surplus when the market changes from perfect competition to a monopoly?

Question

The following figure shows the market demand curve for penicillin, an antibiotic medicine. Initially, the market was supplied by perfectly competitive firms. Later, the government granted the exclusive right to produce and sell penicillin to one firm. The figure also shows the marginal revenue curve (MR) of the firm once it begins to operate as a monopoly. The marginal cost is constant at $3, irrespective of the market structure.
 
-Refer to the figure above.What is the change in consumer surplus when the market changes from perfect competition to a monopoly?

Quizplus · Accepted Answer

Under perfect competition, consumer surplus is the area above the market price and below the demand curve, up to the quantity consumed. Therefore, the initial consumer surplus is equal to the triangle formed by points A, B, and C, which is equal to (9-3) * (48-30) / 2 = 72. 
When the market becomes a monopoly, the firm reduces the quantity supplied to maximize its profits, leading to a higher price (from $3 to $12) and a lower quantity consumed (from 18 to 12). Consumer surplus is reduced to the triangle formed by points D, E, and F, which is equal to (12-3) * (48-30) / 2 = 81. Therefore, consumer surplus decreases by 81-72 = 9 units per consumer, and by 9 * 15 = 135 units in total. The correct choice is D.

The Following Figure Shows the Market Demand Curve for Penicillin