The deadweight loss created by the monopolist is $200. Option d is the right choice.
The deadweight loss in a monopoly arises because the monopolist restricts output to a level where marginal revenue (MR) equals marginal cost (MC), while in a perfectly competitive market, output is at the point where price (P) equals MC. This leads to a smaller quantity and higher price compared to the competitive equilibrium.
Given:
Monopoly:
Quantity (Q) = 40 units
Price (P) = $160
Marginal Cost (MC) of 40th unit = $120
Perfectly Competitive Market:
Q = 60 units
P = $140
Steps to calculate Deadweight Loss:
Identify the triangle of deadweight loss:
Imagine a rectangle representing the total consumer surplus in the competitive market (P1 * Q1).
The actual consumer surplus in the monopoly is a smaller triangle (P2 * Q2).
The deadweight loss is the difference between these two areas.
Calculate the area of the deadweight loss triangle:
Base = difference in quantity (60 units - 40 units) = 20 units
Height = difference in price per unit ($140 - $120) = $20
Area = (1/2) * base * height = (1/2) * 20 units * $20 = $200
Option d is the right choice.
Complete question
Consider a profit-maximizing monopoly pricing under the following conditions. The profit-maximizing quantity is 40 units, the profit-maximizing price is $160 and the marginal cost of the 40th unit is $120. If the good were produced in a perfectly competitive market, the equilibrium quantity would be 60, and the equilibrium price would be $140. The demand curve and marginal cost curves are linear. What is the value of the deadweight loss created by the monopolist?
a. $40
b. $400
c. $100
d. $200