Question: Draw a monopoly graph, with upward sloping marginal cost and on the graph label the area that would be consumer surplus if price were equal to marginal cost, but is producer surplus under monopoly.

Answer: enter image description here

Confusion: I have trouble understanding why CS is the rectangle. I visualize the CS morphing after the price shifts from price of monopoly to price of perfect competition. How do you get the rectangle? enter image description here


1 Answer 1


In perfect competition, CS would be the area of the whole triangle above $P = P_{pc}$, under the demand curve.

So the small triangle ($Q$ from $Q_m$ to $Q_{pc}$ by $P$ from $P_{pc}$ to $P_m$, under the demand curve) is CS that transforms into DWL. This is the CS lost by those units not being bought.

The rectangle $Q$ from $0$ to $Q_m$ by $P$ from $P_{pc}$ to $P_m$ is CS that transforms into PS. This is the CS that producers directly extract from consumers by charging them more money on the units they still sell to them.

The solution is actually only the upper half of your rectangle.


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