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Social Welfare Long Term Outcomes

Imagine a firm with the same cost structure but in each of the four market structures: Competitive, Monopolistically Competitive, Oligopoly, and a Monopoly. Using the concepts of consumer surplus and producer surplus, explain the long run outcome in each market structure and how consumer surplus, producer surplus and dead weight loss changes

Solution Preview

Refer to the attachment for a graph showing output and pricing decision for a monopoly and perfect competition firms with the same course structure.

Both firms, perfect competition and monopoly are facing the same marginal cost (MC) and same long run average cost (LAC).

First, imagine a monopoly firm:
Monopoly will decide on production at point G where MC = MR. However, monopoly will charge at higher price based on demand at B. With output G and price B, the monopoly profit is the rectangle BCED. This is also a producer surplus. ...

Solution Summary

Society is better off as the market is moving away from a monopoly towards perfectly competitive market in terms of bigger consumer surplus. In a monopoly market some of consumer benefits are captured by a monopolist as its profit, while some consumer benefits just disappeared as a deadweight loss.

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