Major Tom\'s Space Flights offers commercial space flights to people willing to

Question

Major Tom's Space Flights offers commercial space flights to people willing to pay for a seat on his rocket ship. Major Tom currently has a monopoly on commercial space travel. The demand for seats on his rocket ship and the cost information are in the table and graph below Major Tom's Market for Space Travel Price (millions of Quantity DemandedMarginal Revenue Marginal Cost (millions (seats) (millions of dollars) dollars) 34 32 30 28 26 24 of dollars) 0 32.00 28.00 24.00 20.00 16.00 2.00 8.00 4.00 0.00 -4.00 8.00 12.00 5.60 6.00 6.40 6.80 7.20 7.60 8.00 8.40 8.80 9.20 9.60 10.00 2 3 4 5 6 20 18 16 14 12 10 8 10 12

Explanation / Answer

C. Major Tom’s Space Flights:

Consumer surplus under monopoly = 1/2 x (34-20)(7-0)

Consumer surplus under monopoly = $49 million.

Consumer surplus under allocatively efficient solution = 1/2 x (34-10)(12-0)

Consumer surplus under allocatively efficient solution = $144 million

Change in consumer surplus = $144 – 49 = $95 million.

• Change in consumer surplus is $95 million.

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