The following figure shows the demand (D), marginal cost (MC), and marginal revenue (MR) for a monopolist firm.

-Refer to the figure above.Compared to the competitive market outcome,the single-price profit-maximizing monopoly reduces consumer surplus by ________.

Question

The following figure shows the demand (D), marginal cost (MC), and marginal revenue (MR) for a monopolist firm.
 
-Refer to the figure above.Compared to the competitive market outcome,the single-price profit-maximizing monopoly reduces consumer surplus by ________.

Quizplus · Accepted Answer

In a competitive market, the consumer surplus is represented by the area above the market price (P₃) and below the demand curve (D), up to the quantity traded (Q₁). Under the monopoly, the profit-maximizing price is P₁ and the quantity is Q₂. The consumer surplus under the monopoly is represented by the area above P₃ and below the demand curve (D), up to Q₁ (the quantity that would have been traded under the competitive market). Therefore, the reduction in consumer surplus due to the monopoly is equal to the area between P₃ and P₁, up to the quantity Q₁, which is given by (P₁ P₃) Q₁ + (Q₃ Q₁) (P₁ P₃)/2. Choice B is the only one that matches this expression.

The Following Figure Shows the Demand (D), Marginal Cost (MC)