The accompanying figure depicts a generalized downward-sloping market demand (D) curve for a product. It also shows the firm's relevant marginal revenue (MR) curve and marginal cost (MC) curve. Use this figure to answer the questions.
-What is the change in total welfare if the firm moves from a monopolist model that charges a single price to a perfect competition model?

Question

The accompanying figure depicts a generalized downward-sloping market demand (D) curve for a product. It also shows the firm's relevant marginal revenue (MR) curve and marginal cost (MC) curve. Use this figure to answer the  questions. 
-What is the change in total welfare if the firm moves from a monopolist model that charges a single price to a perfect competition model?

Quizplus · Accepted Answer

Moving from a monopolist model to perfect competition would result in the firm reducing its price to the level where price equals marginal cost (P=MC), which in this case is $60. At this price, the quantity sold would increase from 5 to 6 units. The consumer surplus would increase from (1/2)(120-60)(5) = $150 to (1/2)(120-60)(6) =$180. The producer surplus would decrease from (1/2)(60-20)(5) = $100 to zero. The total welfare under perfect competition would be the sum of consumer surplus and producer surplus, which is $180. The change in total welfare from the monopolist model to perfect competition is the difference between the total welfare under perfect competition and the total welfare under the monopolist model, which is ($180 - $140 = $40). Therefore, the correct answer is C.

The Accompanying Figure Depicts a Generalized Downward-Sloping Market Demand (D)