Principles of Microeconomics / Unit 8 MIC 0723 worked example, 60 to 90 seconds
Computing the Deadweight Loss
The idea
With straight-line demand and marginal cost, the deadweight loss is a triangle. Its base is the output shortfall, competitive quantity minus monopoly quantity. Its height is the gap between the demand price and marginal cost at the monopoly quantity, since the gap closes to zero at the competitive quantity. Deadweight loss is one half of base times height. Compute the shortfall and the gap first; both come from video seven twenty.
In practice
Worked example: the medicine's monopoly quantity is four thousand doses and its competitive quantity six thousand, a shortfall of two thousand. At four thousand, the demand price is eight dollars and marginal cost is four, a gap of four. Deadweight loss is one half times two thousand times four dollars: four thousand dollars a week of value that nobody receives.
Where people slip
The height is measured at the monopoly quantity, where the gap is widest, not at the competitive quantity, where it is zero. And do not confuse the triangle with the monopolist's profit rectangle; the profit is a transfer from buyers, the triangle is value lost to everyone.
Your place on the trail
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