Questions on consumer surplus, producer surplus, deadweight losses and monopolie
ID: 2495866 • Letter: Q
Question
Questions on consumer surplus, producer surplus, deadweight losses and monopolies 1. Below is the competitive market for cotton. The competitive equilibrium gives us a price of P* and quantity of Q. The authorities then assist the industry by applying a price support P# and agree to purchase any surplus cotton the market will not absorb. At this price support Pa, then, quantity demanded by the free market is QD# while quantity supplied is QSt, with the authorities buying up the surplus of QS-QDA Price per unit of cotton Surplus cotton purchased by govt Supply P# price support P# Demand QS# Quantity of cotton You will notice that areas on the graph have been identified with the letters A through J. By using these letters, please fill in the table below thereby determining the deadweight loss (last cell in the table) from the cotton price support program. (2 point per cell) No price support, competitive Price support giving us Change due to policy quilibrium P*, Q SCORECARD P#.QD#, and QS# Su titive Consumer s Producer surplus, PS Govt expense, -X Welfare, W-CS+PS-X CSExplanation / Answer
Q2. CASE I - Competitive Equilibrium
Equilibrium price = P*
Equilibrium quantity = Q*
Consumer surplus = A + B + C + D + E
Producer surplus = F + G + H
Welfare = CS + PS = A + B + C + D + E + F + G + H
CASE II - Monopolized market
Monopoly price = PM
Monopoly quantity = QM
Consumer surplus = A + B
Producer surplus = C + D + F + G
Welfare = CS + PS = A + B + C + D + F + G
Calculate change in consumer surplus due to existence of monopoly -
Change in consumer surplus = CS in competitive equilibrium - CS in monopoly
= (A + B + C + D + E) - (A + B)
= C + D + E
Calculate change in Producer surplus due to existence of monopoly -
Change in producer surplus = PS in competitive equilibrium - PS in monopoly
= (F + G + H) - (C + D + F + G)
= H - (C + D)
Calculate Change in welfare due to existence of monopoly -
Change in welfare = Welfare in competitive equilibrium - Welfare in monopoly
= (A + B + C + D + E + F + G + H) - ( A + B + C + D + F + G)
= E + H
Following is the complete table -
Competitive equilibrium
P*, Q*
Monopolized
market
PM, QM
Change due to existence of
monopoly,
i.e., competition v. monopoly
Consumer surplus,
CS
Producer surplus,
PS
Welfare,
W = CS + PS
Scorecard
Competitive equilibrium
P*, Q*
Monopolized
market
PM, QM
Change due to existence of
monopoly,
i.e., competition v. monopoly
Consumer surplus,
CS
A+B+C+D+E A+B C+D+EProducer surplus,
PS
F+G+H C+D+F+G H - (C+D)Welfare,
W = CS + PS
A+B+C+D+E+F+G+H A+B+C+D+F+G E+HRelated Questions
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