Questions: Use the figure above. What is the Consumer Surplus under a monopoly industry?

Transcript text: Use the figure above. What is the Consumer Surplus under a monopoly industry?

Solution

Solution Steps

Step 1: Locate the Monopoly Price and Quantity

Under a monopoly, the firm produces where Marginal Revenue (MR) equals Marginal Cost (MC), which is represented by the supply curve. This intersection occurs at point B, which corresponds to a quantity of 1 and a price of 9 (point A on the demand curve).

Step 2: Identify the Consumer Surplus Area

Consumer surplus is the area between the demand curve and the price line, up to the quantity consumed. In this case, it's the triangle formed by the demand curve, the price line at 9, and the vertical axis.

Step 3: Calculate the Consumer Surplus

The base of the triangle is the quantity (1), and the height is the difference between the maximum price consumers are willing to pay (12, where the demand curve intersects the price axis) and the monopoly price (9). Consumer Surplus = (1/2) * base * height Consumer Surplus = (1/2) * 1 * (12 - 9) Consumer Surplus = (1/2) * 1 * 3 Consumer Surplus = 1.5

Final Answer:

The consumer surplus under the monopoly is 1.5.

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