Chapter 62, Problem 2FRQ

a)

To determine

Graph showing consumer surplus in perfectly competitive market.

Answer to Problem 2FRQ

Diagram (a) shows the consumer surplus.

Explanation of Solution

Diagram (a) shows the perfect competition market equilibrium in which the demand curve intersects the demand curve which determines the equilibrium price and quantity. The area is the consumer surplus which is the area below the demand curve and above the price line.

Economics Concept Introduction

Introduction:

  

A perfectly competitive market’s profit-maximizing condition is the equalization of marginal cost and price which is determined by the intersection of the demand curve and marginal cost curve. Equalization of marginal cost and marginal revenue is the monopoly market profit maximization condition. The price charged in the monopoly market is higher than in a perfectly competitive market.

b)

To determine

Graph showing consumer surplus with the monopoly.

Answer to Problem 2FRQ

In diagram (b), blue shaded region is the consumer surplus.

Explanation of Solution

Diagram (b) shows the monopoly market equilibrium, monopolist profit is maximized at the intersection of marginal cost and marginal revenue. Blue shaded region is the consumer surplus because it is the area under the demand curve and above the price line.

Economics Concept Introduction

Introduction:

  

A monopolist charges a different price from different consumers for the same quantity. Profit-maximizing output and price are determined at the point where the marginal revenue curve intersects the marginal cost curve.

c)

To determine

Graph showing the profit of the monopolist.

Answer to Problem 2FRQ

Green shaded area in diagram (b) is the monopoly’s profit.

Explanation of Solution

Green shaded area in diagram (b) is the monopoly’s profit because at this level marginal cost curve intersects marginal revenue.

Economics Concept Introduction

Introduction:

  

Profit is the difference between total revenue and total cost.

d)

To determine

Graph showing deadweight loss with the monopoly.

Answer to Problem 2FRQ

Diagram (b) shows the deadweight loss.

Explanation of Solution

The white triangle region in diagram (b) is the deadweight loss that is created due to the high price charged by the monopoly.

Economics Concept Introduction

Introduction:

  

Deadweight loss is the efficiency loss that arises due to the high price charged by the monopolist.