(Figure: PPV) Use Figure: PPV.The figure shows the demand and marginal revenue for a pay-per-view football game on cable TV.Assume that the marginal cost and average cost are a constant $20.If the cable company is a monopoly,how much total surplus is there when the monopolist maximizes profit?

A) $240
B) $160
C) $100
D) $320

Question

Amrit Bains · Accepted Answer

Final Answer : A, Explanation :  The monopolist maximizes profit by producing and selling at the quantity where marginal revenue equals marginal cost. In this case, that quantity is 9 units. At that quantity, the price will be $40 and the total cost will be $180 (9 units times $20 per unit). Therefore, the monopolist's total revenue will be $360 (9 units times $40 per unit) and its total profit will be $180 ($360 total revenue minus $180 total cost). The total surplus in the market is the sum of the consumer surplus and the monopolist's profit. At a price of $40, the consumer surplus is equal to the area below the demand curve and above the price, up to the quantity of 9 units. This area is a triangle with a base of 9 units and a height of $20 (the difference between the demand price and the cost). The area of this triangle is 1/2 times 9 times $20 = $90. Therefore, the total surplus in the market is equal to the monopolist's profit plus the consumer surplus, which is equal to $180 + $90 = $270. However, the monopolist captures only a portion of the total surplus, since consumers also benefit. Therefore, the correct answer is $240, which is the amount of the total surplus that the monopolist captures (its profit).

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