Use the following to answer question:
Figure: Demand and Marginal Revenue
-(Figure: Demand and Marginal Revenue)Use Figure: Demand and Marginal Revenue.The figure refers to a software upgrade.The producer incurred fixed costs of $10 million to produce the upgrade;the marginal cost of allowing consumers to download the upgrade is zero.What is the deadweight loss associated with the profit-maximizing price and quantity of the upgrade?
A)$0
B)$1.25 million
C)$3.125 million
D)$6.25 million

Question

Use the following to answer question:
Figure: Demand and Marginal Revenue 
-(Figure: Demand and Marginal Revenue)Use Figure: Demand and Marginal Revenue.The figure refers to a software upgrade.The producer incurred fixed costs of $10 million to produce the upgrade;the marginal cost of allowing consumers to download the upgrade is zero.What is the deadweight loss associated with the profit-maximizing price and quantity of the upgrade?
A)$0 
B)$1.25 million 
C)$3.125 million 
D)$6.25 million

Quizplus · Accepted Answer

The profit-maximizing price and quantity correspond to the intersection of the marginal revenue curve (MR) and the marginal cost curve (MC), which is at a price of $62.50 and a quantity of 100,000 downloads. The deadweight loss is the area of the triangle between the demand curve (D) and the marginal revenue curve (MR) above the profit-maximizing quantity. Using the formula for the area of a triangle, the deadweight loss is 0.5((125-62.50) x (150,000-100,000)) = $3.125 million. Therefore, the answer is C.

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