Question

The market demand for a good is p = 70 - q. the good can be produced at a constant cost of $10. how much deadweight loss is created if the market is served by a monopolist as opposed to a competitive market?

Answer 1

The deadweight loss created by a monopolist occurs when there is a loss in consumer surplus and inefficiency in resource allocation due to the monopolist's ability to set higher prices and restrict output.

Step-by-step explanation:

The deadweight loss created by a monopolist as opposed to a competitive market can be calculated by comparing the consumer surplus and producer surplus between the two market structures.

In a competitive market, the consumer and producer surplus is maximized because the price is equal to the marginal cost of production, resulting in the efficient allocation of resources.

However, in a monopolistic market, the monopolist can charge a higher price and restrict output, leading to a loss in consumer surplus and deadweight loss.

For example, in the given scenario where the market demand is p = 70 - q, the monopolist may choose to produce at a quantity of 40 and a price of $16, as indicated in Figure 10.3.

This price is higher than the marginal cost of production, resulting in a higher price for consumers compared to a competitive market. The difference between the consumer surplus in a competitive market and under the monopolist's pricing strategy represents the deadweight loss.