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Homework answers / question archive / Suppose Conye is the only musician of his kind this generation such that he may be treated as a monopoly
Suppose Conye is the only musician of his kind this generation such that he may be treated as a monopoly. He produces songs and releases them as CDs. The graph below illustrates the demand for and cost of CDs. a) What is Conye's profit-maximizing price and quantity? b) Calculate producer surplus at the profit-maximizing price. c) At the profit-maximizing price, what is consumer surplus? d) Do monopolies create deadweight loss? If so, then provide a calculation of the amount of deadweight loss Conye creates when maximizing profit. CDs Price, Cost ($) 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 20,000 40,000 100,000 120,000 140,000 60,000 80,000 Quantity -Demand —Marginal Revenue - Marginal Cost
A.
Profit maximising quantity : 40,000
Price : 18
Explanation :
Firm maximises it's profit where MR equals MC and charge price on the demand curve above where MR equals MC. Here at quantity 40,000, MR equals MC and charge price 18 on demand curve above where MR equals MC.
B.
Producer surplus is the area between MC curve and price.
Here producer surplus is a rectangle and triangle.
So rectangle producer surplus =Base *hight
=(40000-0)*(18-10)
=40,000*8
=320, 000
And triangle producer surplus =1/2*base *hight
=1/2*(40,000-0)*(10-2)
=1/2*40,000*8
=160,000
So producer surplus =160,000+320,000=480,000.
C.
Consumer surplus is the area between demand curve and price.
Consumer surplus =1/2*base *hight
=1/2*(40,000-0)*(26-18)
=160,000
D.
Deadweight loss occurs when monopolist produce profit maximising quantity and not socially efficient quantity.
Deadweight loss =1/2*base *hight
=1/2*(60,000-40,000)*(18-10)
=80,000
