Principles of Microeconomics / Unit 8 MIC 0720 worked example, 60 to 90 seconds
The Output Shortfall
The idea
Given a demand schedule and a marginal cost schedule, find two quantities. The competitive quantity is where the demand price equals marginal cost, the largest quantity for which buyers pay at least what the unit costs. The monopoly quantity is where marginal revenue equals marginal cost. The output shortfall is the difference, and the price gap is the demand price at the smaller quantity minus the demand price at the larger. State both, since the exam asks for either.
In practice
Worked example: the medicine's demand price falls from eleven to four dollars across one to eight thousand doses while marginal cost rises two, two, three, four, five, six, seven, eight. Demand price meets marginal cost at six thousand, where both are six dollars: the competitive outcome. Marginal revenue meets marginal cost at four thousand: the monopoly outcome, at eight dollars. The shortfall is two thousand doses a week, and the price gap is two dollars.
Where people slip
Use marginal cost as the competitive supply curve; that is what unit seven established. And the shortfall is not the whole monopoly quantity; the monopolist still produces four thousand, and the loss to society is the two thousand it withholds.
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