If the demand curve is P = 48 - 2Q and MC = 0, calculate the lost social welfare that results from a single price monopoly profit maximizing strategy.
What will be an ideal response?
A monopolist will have MR = 48 - 4Q and 0 MC so quantity will be 12 and price 24. A perfect competitor will have price bid down to zero. The welfare triangle lost will be the area under the demand curve from price 24 to 0. This means 12 fewer items are produced so 24 times 12 divided by 2 gives the area of the welfare loss triangle.
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