All consumers are alike and each has an inverse demand curve for a monopolist's product of P = 100 - 2Q. The marginal cost of production is constant at MC = $10. Let the monopolist charge a price of $10 per unit purchased and a subscription fee of $2025 that must be paid by each purchaser. What is the amount of consumer's surplus generated by this scheme?
A) 0
B) $2025
C) $2025 multiplied by the number of consumers in the market.
D) $90 multiplied by the number of units purchased.

Question

Quizplus · Accepted Answer

When the monopolist charges a price of $10 per unit, the quantity demanded will be Q = (100 - P)/2 = (100 - 10)/2 = 45.

The total revenue earned from each consumer will be $10 x 45 + $2025 = $2475.

The monopolist's profit-maximizing output level is where marginal cost equals marginal revenue.

Since the marginal revenue for a monopolist is always less than the demand curve, we know that it is less than $100 for any quantity other than zero.

Therefore, the monopolist will produce at a level where P = MC = $10, which means that output is Q = 45.

At this level of output, the total revenue earned by the monopolist is $2475, which is equal to the total amount paid by consumers in the market.

The amount of consumer surplus generated by this scheme is $0 because consumers are paying exactly the maximum amount they are willing to pay for the product.

Therefore, the correct answer is (A), $0.

All Consumers Are Alike and Each Has an Inverse Demand