Chapter 13, Problem 3.1P

To determine

Total revenue, total cost, profit, consumer surplus, and dead weight loss.

Explanation of Solution

Case 1: Under competition:

The profit maximizing price under competition $\left({\text{P}}_{\text{C}}\right)$ is $250, the quantity of output (Q) produced at that price is 5,000.

The total revenue (TR) of the firm under competition is calculated as follows:

$\begin{array}{c}{\text{TR=P}}_{\text{C}}\times \text{Q}\\ \text{=250}\times \text{5,000}\\ \text{=1,250,000}\end{array}$

The total revenue of the competitive firm is $1,250,000.

The total cost (TC) of the firm under competition is calculated as follows:

$\begin{array}{c}\text{TC=MC}\times \text{Q}\\ \text{=250}\times \text{5,000}\\ \text{=1,250,000}\end{array}$

The total cost of the competitive firm is $1,250,000.

The profit of the firm under competition is calculated as follows:

$\begin{array}{c}\text{Profit=TR}-\text{TC}\\ \text{=1,250,000}-1,250,000\\ =0\end{array}$

The profit under competition is $0.

The consumer surplus under competition is calculated as follows:

$\begin{array}{c}\text{Consumer surplus = }\frac{1}{2}\times \left(\text{Maximum amount willing to pay }-\text{ Actual amount paid}\right)\times \text{Q}\\ \text{= }\frac{1}{2}\times \left(\text{500 }-\text{ 250}\right)\times \text{5,000}\\ =\left(\text{250}\right)\times \text{2,500}\\ \text{=625,000}\end{array}$

The consumer surplus under competition is $625,000.

There is no dead weight loss under competition; the deadweight loss is thus $0.

The diagram of the all the firms being into a monopoly is depicted in Figure 1.

In Figure 1, the horizontal axis depicts the quantity of output and the vertical axis depicts the price.

Case 2: Under Monopoly

The profit maximizing price under monopoly $\left({\text{P}}_{\text{M}}\right)$ is $375, where the marginal cost (MC) equals the marginal revenue (MR_M) and at that price, the quantity of output (Q) produced is 2,500.

The total revenue (TR) of the firm under monopoly is calculated as follows:

$\begin{array}{c}{\text{TR=P}}_{\text{M}}\times \text{Q}\\ \text{=375}\times \text{2,500}\\ \text{=937,500}\end{array}$

The total revenue of the monopoly firm is $937,500.

The total cost (TC) of the firm under monopoly is calculated as follows:

$\begin{array}{c}\text{TC=MC}\times \text{Q}\\ \text{=250}\times \text{2,500}\\ \text{=625,000}\end{array}$

The total cost of the monopoly firm is $625,000.

The profit of the firm under a monopoly is calculated as follows:

$\begin{array}{c}\text{Profit=TR}-\text{TC}\\ \text{=937,500}-625,000\\ =312,500\end{array}$

The profit of monopoly firm is $312,500.

The consumer surplus of a monopoly firm is calculated as follows:

$\begin{array}{c}\text{Consumer surplus = }\frac{1}{2}\times \left(\text{Maximum amount willing to pay }-\text{ Actual amount paid}\right)\times \text{Q}\\ \text{= }\frac{1}{2}\times \left(\text{500 }-\text{ 375}\right)\times \text{2,500}\\ =\left(\text{125}\right)\times 1,\text{250}\\ \text{=156,250}\end{array}$

The consumer surplus of a monopoly firm is $156,250.

The deadweight loss under monopoly is the area of the triangle mentioned in Figure 1 which is calculated as follows:

$\begin{array}{c}\text{Deadweight loss = }\frac{1}{2}\times \left(\text{375 }-\text{ 250}\right)\times \left(5,000-2,500\right)\\ \text{= }\frac{1}{2}\times \left(125\right)\times \text{2,500}\\ =\left(\text{125}\right)\times 1,\text{250}\\ \text{=156,250}\end{array}$

The deadweight loss of the monopoly firm is $156,250.

The potential remedies include the following:

1. 1. Breaking up the monopoly by imposing a price ceiling $\left({\text{P}}_{\text{C}}\right)$ at $250,
2. 2. Eliminating barriers to entry,
3. 3. Imposing sanctions on violators of provisions of the anti-trust laws,
4. 4. Obtaining a decree to stop anti-competitive behavior.

Economics Concept Introduction

Monopoly: A monopoly is a market structure where there is only one seller of a good or service, which does not have a close substitute.

Marginal revenue (MR): Marginal revenue is the additional revenue earned by a firm by producing an extra unit of output.

Marginal cost (MC): Marginal cost is the additional cost incurred by the firm by producing an extra unit of output.

Total revenue (TR): TR is the amount of money that a firm, company, or an industry actually receives during a specific period.

Total cost (TC): TC is the total expenses incurred by a firm in the production of a particular amount of goods and services during a specific period of time.

Perfectly competitive market: It is the perfect market structure where there are a large numbers of sellers and buyers, with sellers selling homogeneous products.

Consumer surplus: Consumer surplus is the difference between the total amount that consumers are willing to pay for a good or service and the total amount that they actually do pay.