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A monopoly has an inverse demand curve given by p = 16 - Q and a constant marginal cost of $2
A monopoly has an inverse demand curve given by
p = 16 - Q
and a constant marginal cost of $2. Calculate deadweight loss if the monopoly charges the profit-maximizing price.
Deadweight loss equals $__________. (Enter your response rounded to two decimal places.)
Expert Solution
Computation of Deadweight Loss if the monopoly charges the profit-maximizing price:
Monopoly produces at a point where Marginal Revenue is equal to Marginal Cost (MR = MC).
MR = 16-2Q (As MR is double sloped than the demand curve equating with MC)
16-2Q = $2
2Q = 16 - 2
2Q = 14
Q = 7
So,
P = 16-7 = $9
Deadweight Loss = 0.5 * Change in Quantity * Change in Price
= 0.5 * [ (7 * 2) - 7 ] * (16 - 9)
= 0.5 * (14 - 7) * 7
= 0.5 * 7 * 7
Deadweight Loss = $24.50
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