Question

Consider a profit-maximizing monopoly pricing under the following conditions. The profit-maximizing price charged for goods produced is $12.The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $6. The socially efficient level of production is 12 units. The demand curve and marginal cost curves are linear. What is the value of the deadweight loss created by the monopolist?

Answer 1

Answer:

The dead weight loss created will be equal to $6.

Explanation:

A profit-maximizing monopoly is charging the price of $12.

The profit-maximizing output level is 10 units.  

The marginal cost at this level is $6.  

The socially optimal level of output is 12 units.  

The demand and cost curves are linear.  

Since the monopoly firm is producing less than socially optimal level and charging a higher price, it will create a deadweight loss in the market.

The value of the deadweight loss will be equal to the triangular area created by AR, MR and MC curve between socially optimal output and profit-maximizing output.  

The deadweight loss

= $\frac{1}{2}\times base \times height$

= $\frac{1}{2} \times 12-6 \times 12-10$

= $\frac{1}{2} \times 6 \times 2$

= $6