What are a consumer and a producer?

Consumer surplus, producer surplus, total welfare from exchange, dead weight loss from monopoly?

• Demand in the Organic Spaghetti industry is given as QD = 190 - (1/3) P. Total costs for the industry (assumed to be the combined total costs for “numerous” firms) is given as TC = 200 + 80Q + 2Q2 . A. Suppose that the industry is perfectly competitive. Compute the market price and quantity under these conditions. (Remember where to get the Supply curve?). What are consumer surplus, producer surplus, and the total welfare from exchange? B. Suppose the industry is instead a monopoly. Now compute market price and quantity under these conditions. What is monopoly profit? What are consumer surplus, producer surplus, and the total welfare from exchange? C. What is the deadweight loss from monopoly? What is the percent of total welfare lost?

• Answer:

  Solve the inverse demand function, so you can easily work with it. P = 570 - 3Q A. The supply curve is the marginal cost curve. MC is the derivative of TC. MC = 80 + 4Q In a perfect competition, the firm optimizes by setting MC = P. MC = P 570-3Q = 80+4Q 7Q = 490 Q = 70 Use Q=70 in the inverse demand function to determine the price. P = 570 - 3(70) = 360 Draw the graph so you can visualize the "triangles." Area of a triangle = 1/2 base * height The producer surplus is: 1/2 base * height =1/2 (360 - 80) * 7 = 1260 The consumer surplus is: 1/2 base * height = 1/2 (570 - 360) * 7 = 735 The total welfare is the sum of consumer and producer surpluses. 1715 B. The monopoly optimizes by setting MR = MC. MR is similar to demand. It has the same intercept as demand, but double the slope. Demand: P = 570 - 3Q Marginal revenue: MR = 570 - 6Q MC, as solved from before: MC = 80 + 4Q MR = MC 570 - 6Q = 80 + 4Q 10Q = 490 Q = 49 P = 570 - 3(49) = 423 Calculate the area of the consumer and producer surpluses area. The area of a trapezoid is: http://www.mathgoodies.com/lessons/vol1/area_trapezoid.html Draw the graph if you need further help visualizing this. Alternatively, you can calculate the sum of a square and triangle to determine the surplus. The monopoly sum of the consumer surplus, producer surplus, and deadweight loss should equal the sum of consumer and producer surpluses from a perfect competition. To calculate percentage change %change = change / old value %change = (new value - old value) / old value Your answer should be negative because it is a decrease.