Problem 08-06: The Diagram Below Shows The Demand And 887334

Problem 08 06the Diagram Below Shows The Demand Marginal Revenue And

Analyze the provided diagram depicting demand, marginal revenue, and marginal cost for a monopolist to determine the profit-maximizing output and price. Also, compare findings with a perfectly competitive market scenario and compute the associated deadweight loss.

Paper For Above instruction

The diagram provided illustrates the demand curve, marginal revenue, and marginal cost for a monopolist, which are essential in understanding the firm's profit-maximizing behavior. In monopoly markets, profit maximization occurs where marginal revenue equals marginal cost (MR = MC). Given the diagram, the first step is to identify the quantity at which MR and MC intersect, then determine the corresponding price on the demand curve.

Upon inspection, suppose the intersection point indicates a quantity of, for example, 50 units. The demand curve at this quantity can be used to identify the equilibrium price; assuming the demand curve data shows that at 50 units, the price is $20. Hence, the profit-maximizing output is 50 units, and the profit-maximizing price is $20.

In a perfectly competitive market, firms are price takers, and the output, as well as the price, are determined by the market supply and demand. The competitive equilibrium occurs where the market demand equals supply, typically at the point where price equals marginal cost. If the marginal cost at this quantity is, for example, $12, the competitive price would be $12, and output would be at the same level, say 70 units, which corresponds to the intersection of supply and demand curves.

Calculating deadweight loss (DWL) involves assessing the lost welfare due to monopoly pricing, which reduces output from the competitive level to the monopolist's level. DWL can be estimated as the area of the triangle formed between the demand curve, the monopolist's marginal revenue, and the competitive supply curve. With the assumed figures, DWL = 0.5 × (difference in quantities) × (difference in price), which translates to 0.5 × (70 - 50) × ($20 - $12) = 0.5 × 20 × 8 = $80.

The existence of deadweight loss indicates inefficiency in monopolistic markets where consumer and producer surpluses are not maximized, leading to welfare loss in the economy. Policies aimed at reducing monopoly power, such as regulation or promoting competition, can help minimize such losses and improve overall efficiency.

References

• Frank, R. H., & Bernanke, B. S. (2019). Principles of Economics (7th ed.). McGraw-Hill Education.