In Figure 17-4,below,initial demand,marginal cost,and marginal revenue curves (none of them shown)caused the firm to produce the profit-maximizing quantity Y₀ at a price of P₀.Now the demand and marginal cost curves have moved to those shown,with the marginal revenue curve running through point L.
Figure 17-4

-If the firm in Figure 17-4 above maintains its set price of P₀,rather than dropping price to P₁,the welfare loss to society due to this decision is
A)J + K.
B)K - G.
C)G + H.
D)H + K.
E)F + G + H.

Question

In Figure 17-4,below,initial demand,marginal cost,and marginal revenue curves (none of them shown)caused the firm to produce the profit-maximizing quantity Y₀ at a price of P₀.Now the demand and marginal cost curves have moved to those shown,with the marginal revenue curve running through point L.
Figure 17-4
 
-If the firm in Figure 17-4 above maintains its set price of P₀,rather than dropping price to P₁,the welfare loss to society due to this decision is
A)J + K. 
B)K - G. 
C)G + H. 
D)H + K. 
E)F + G + H.

Quizplus · Accepted Answer

To find the welfare loss, we need to compare the total surplus before and after the change in the demand and marginal cost curves.

Before the change, the total surplus is represented by the area J + K + G + H, with consumer surplus J + K and producer surplus G + H.

After the change, the new equilibrium quantity will be Y1, where the demand and marginal cost curves intersect. The new price will be P1.

If the firm maintains its set price of P0, it will produce Y0, which is less than the new equilibrium quantity Y1. This means that there will be some unsatisfied demand, represented by the area F.

The welfare loss due to this decision is represented by the areas of deadweight loss, which is the triangle KFH.

Therefore, the welfare loss to society is H + K. The correct answer is D.

In Figure 17-4,below,initial Demand,marginal Cost,and Marginal Revenue Curves (None of Them