1. How is the welfare cost of monopoly measured? also give example.2. How can economies of scale...

Question

1. How is the welfare cost of monopoly measured? also give example.
2. How can economies of scale lead to monopoly? also give example.
3. What is the short-run profit-maximizing policy of a monopolistically competitive firm? also give an example.
4. How is the long-run equilibrium of monopolistic competition like that of perfect competition? also give example.

David · Accepted Answer

1) A monopolist charges a price greater than the marginal cost. This creates some welfare loss to 
the society. This is termed as the welfare cost of monopoly or dead-weight loss. It is measured 
by the total decrease in producer surplus and consumer surplus.
Source: http://www.policonomics.com/wp-content/uploads/Monopoly.jpg 
Consider the above diagram. Under perfect competition, the consumer surplus is given by the 
area (A+C
/
+D) and the producer surplus is given by the area (B+C). Now, under monopoly, 
when the firm charges PM, then the consumer surplus reduces to area D and the producer surplus 
become area (C+C
/
). 
Therefore, welfare cost to monopoly is the dead weight loss given by the area [(A+C
/
+D+ B+C) 
– (D+C+C
/
)] = A+B 
http://www.policonomics.com/wp-content/uploads/Monopoly.jpg
2) A situation of monopoly can arise due to several factors.

1. How is the welfare cost of monopoly measured? also give example. 2. How can economies of scale lead to monopoly? also give example. 3. What is the short-run profit-maximizing policy of a...

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