Purchase Solution

# Consumer surplus, producer surplus and deadweight loss

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The market demand curve for a product is given as:
Q = 250 - 0.5P

a) Firm X1- Assume that the market is supplied by a monopolist with a constant unit cost equal to \$100. Calculate the equilibrium price and quantity

b) Firm X2- Now assume that the market is supplied by perfectly competitive firms and that the market supply curve is perfectly elastic at a price equal to \$100.

Calculate the equilibrium price and quantity. Explain why the output and price levels are different for X1 and X2. Explain what occurs to consumer surplus, producer surplus, and deadweight loss.

##### Solution Summary

This post shows how the consumer surplus, producer surplus and deadweight loss are compared for a monopoly and perfect competition.

##### Solution Preview

a) The reverse demand function is P=500-2Q
For monopoly equilibrium is when MR=MC
TR=P*Q=500Q-2Q^2
MR=dTR/dQ=500-4Q
MC=100
Equating we get 500-4Q=100
Q=100
P=500-2*100300

b) ...

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