Here's what I think I know about the answer: to get the $ value of DWL you have to take the area of the aggregate surplus under perfect competition and substract the area of the aggregate surplus under monopoly (helps to make a little graph.) The funny thing is, my main problem is I don't know the geometry necessary to do that. There may be another method, I'll leave it to you.
Here's the problem:
I am considering giving a patent for a new drug. The public demand is given by: P = 120 - 10Q, where Q is quantity of the drug and P is price. If the marginal cost of production is given by MC = 2Q, what will be the monetary value of the efficiency loss of granting the company monopoly power (meaning a patent)?
Remember that a marginal revenue function can be derived from a linear demand function by doubling the slope of that function.© BrainMass Inc. brainmass.com October 24, 2018, 7:26 pm ad1c9bdddf
Let's first determine the equilibria with free competition and with a monopoly.
Under perfect competition, equilibrium arises when demand is equal to MC. So we have:
120 - 10Q = 2Q
12Q = 120
Q = 10
Now, plugging this equilibrium Q into the demand equation, we get that the equilibrium price is 20.
Under a monopoly, equilibrium arises when Marginal Revenue is equal to MC. We use the general formula that states that when demand is of the form A - B*Q, then marginal income is A - 2B*Q. So in this case, marginal revenue is 120-20Q. Now we find the equilibrium:
120 - 20Q = 2Q
22Q = 120
Q = 5.4545...
Plugging this Q into the demand ...
Determine equilibria with free competition and with a monopoly.
Imperfectly competitive markets
What do economists mean by the term "imperfectly competitive markets"?
How do market prices differ between perfectly and imperfectly competitive markets?View Full Posting Details