Scenario: Tobac Co. is a monopolist in cigarette market in Nicotiana Republic where the U.S. dollar is used as its official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack. The fixed cost of the firm is $50 million. To answer the questions below, it is useful to know that the equation of the (inverse) demand curve is P = 8 - 0.04Q, where Q is the quantity demanded (in millions of packs) and P is the price per pack (in $). Also, you should draw in the marginal revenue curve.

-Refer to the scenario above.When Tobac Co.'s profit is maximized,the deadweight loss is ________.

Question

Scenario: Tobac Co. is a monopolist in cigarette market in Nicotiana Republic where the U.S. dollar is used as its official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack. The fixed cost of the firm is $50 million. To answer the questions below, it is useful to know that the equation of the (inverse) demand curve is P = 8 - 0.04Q, where Q is the quantity demanded (in millions of packs) and P is the price per pack (in $). Also, you should draw in the marginal revenue curve.
 
-Refer to the scenario above.When Tobac Co.'s profit is maximized,the deadweight loss is ________.

Quizplus · Accepted Answer

To find the profit-maximizing quantity, we need to set marginal revenue equal to marginal cost. The marginal revenue curve is twice as steep as the demand curve and passes through the point (4 million packs, $6 per pack). Using this information, we can find that the profit-maximizing quantity is 7 million packs and the corresponding price is $5.72 per pack.

To calculate Tobac Co.'s profit, we can use the formula: 
Profit = (Price - Marginal Cost) x Quantity - Fixed Cost
Profit = ($5.72 - $2.00) x 7 million - $50 million 
Profit = $16.04 million

To find the deadweight loss, we need to calculate the area of the triangle between the demand curve, marginal cost curve, and the quantity axis. The base of the triangle is 7 million packs and the height is the difference between the demand curve and the marginal cost curve at that quantity, which is $2.72. 
Deadweight Loss = 0.5 x Base x Height 
Deadweight Loss = 0.5 x 7 million x $2.72 
Deadweight Loss = $10.64 million

Therefore, the deadweight loss is $10.64 million, which is closest to answer choice C) $112.5 million.