Question

Suppose the conglomerate Enn, Golf & Devour takes monopoly control of the nano-widget market by acquiring all of the previously purely (perfectly) competitive firms in the industry. Use the information about marginal cost (MC), demand, and marginal revenue (MR) in the graph below to answer the questions. Place the points PC ands M at the respective perfectly competitive and monopolistic price and quantity combinations. PC 20.00 19.00 Price ($) Marginal revenue Demand 14.00 17.00 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Quantity (millions of nano-widgets) When the industry is monopolized, how much surplus is transferred from consumers to the monopolist? million What is the efficiency (or deadweight) loss due to monopoly control of the industry? million

Answer 1

When Enn, Golf & Devour takes monopoly control of the nano-widget market, they are able to extract a surplus of $19.8 million from consumers.

This comes at a cost to society in the form of a deadweight loss of $7.7 million.

Finding the equilibrium points:

Perfectly competitive equilibrium (PC):

The demand curve intersects the marginal cost (MC) curve at around 14 million nano-widgets and $12 per unit. This is the point where the price is equal to the marginal cost in a perfectly competitive market.

Monopoly equilibrium (M):

The monopolist sets the price at the point where marginal revenue (MR) equals marginal cost (MC). This occurs at around 9 million nano-widgets and $17 per unit.

Surplus transfer from consumers to the monopolist:

In the perfectly competitive equilibrium, the consumer surplus is the triangular area between the demand curve and the price line at 14 million nano-widgets.

In the monopoly equilibrium, the consumer surplus is the smaller triangular area between the demand curve and the price line at 9 million nano-widgets.

The difference between these two areas represents the surplus transferred from consumers to the monopolist. This is because the monopolist is able to extract a higher price from consumers than would be possible in a competitive market.

Calculating the surplus transfer:

The consumer surplus in the perfectly competitive equilibrium is approximately 0.5 × (14 million - 12) × 12 = $10.8 million.

The consumer surplus in the monopoly equilibrium is approximately 0.5 × (9 million - 17) × 17 = $30.6 million.

Therefore, the surplus transferred from consumers to the monopolist is approximately $30.6 million - $10.8 million = $19.8 million.

Deadweight loss due to monopoly:

The deadweight loss is the triangular area between the demand curve, the perfectly competitive price line (at 14 million nano-widgets), and the monopoly price line (at 9 million nano-widgets).

This area represents the loss of welfare to society as a whole due to the monopoly's restriction of output.

Calculating the deadweight loss:

The deadweight loss is approximately 0.5 × (14 million - 9 million) × (17 - 12) = $7.7 million.

Missing graph from the question:

Answer 2

1. The amount of surplus transferred to monopolist is $24 million.

2. The deadweight loss from the monopoly control is $12 million

Most perfectly competitive market optimizes at a level that correspond to the point where its MC intersects the price but monopoly optimizes the where its MC intersects its MR curve. Both is observed in the attached graph.

When industry is monopolized, the surplus amount being transferred from consumers to the monopolist is represented as:

= Area of C+D

= (12-8) * $6 million

= 4 * $6 million

= $24 million

The deadweight loss from monopoly control is:

= Area of E+ F

=(12-6) * (10-6)/2

= 12.