Monopoly deadweight loss is $60 due to restricted output and raised price.
(a) Determine the profit-maximizing output and price.
The profit-maximizing output is the output at which the marginal revenue (MR) equals the marginal cost (MC). In the diagram, this occurs at an output of 3 units. The corresponding price is where the extended line meets the demand curve, which is $70.
Therefore, the profit-maximizing output is 3 units and the profit-maximizing price is $70.
(b) What price and output would prevail if this firm's product was sold by price-taking firms in a perfectly competitive market?
In a perfectly competitive market, firms are price-takers, meaning that they have no control over the price of their output. The equilibrium price in a perfectly competitive market is determined by the intersection of the demand and supply curves.
In the diagram, the equilibrium price in a perfectly competitive market would be $40 and the equilibrium output would be 6 units.
Therefore, the price and output that would prevail in a perfectly competitive market are $40 and 6 units, respectively.
(c) Calculate the deadweight loss of this monopoly.
The deadweight loss of a monopoly is the welfare loss that occurs when a monopoly restricts output and raises prices above the competitive level. The deadweight loss can be calculated as the area of the triangle between the demand curve and the marginal cost curve above the equilibrium price in a perfectly competitive market.
In the diagram, the deadweight loss is the area of the triangle labeled "DWL." This triangle can be calculated as 1/2 * (70-40) * (6-3) = $60.
Therefore, the deadweight loss of this monopoly is $60.
Explanation in detail:
A monopolist is a firm that has the exclusive power to produce and sell a particular good or service. Monopolists can restrict output and raise prices above the competitive level, which results in deadweight loss.
Deadweight loss is the welfare loss that occurs when a market is not perfectly efficient. In the case of a monopoly, deadweight loss occurs because the monopolist restricts output and raises prices above the competitive level. This means that some consumers who would be willing to buy the product at the competitive price are unable to do so, and some producers who would be willing to sell the product at the competitive price are unable to do so.
The deadweight loss of a monopoly can be calculated using the following formula:
DWL = 1/2 * (P_m - P_c) * (Q_c - Q_m)
where:
DWL = deadweight loss
P_m = monopoly price
P_c = competitive price
Q_c = competitive quantity
Q_m = monopoly quantity
In the diagram, the monopoly price is $70 and the monopoly quantity is 3 units. The competitive price is $40 and the competitive quantity is 6 units. Therefore, the deadweight loss of the monopoly is:
DWL = 1/2 * (70-40) * (6-3) = $60
This means that consumers and producers lose $60 in welfare due to the monopoly's market power.