Answer to Question #76117 in Microeconomics for Khalid Butt

Question

A small town is served by many competing supermarkets, which have constant marginal
cost.
a. Using a diagram of the market for groceries, show the consumer surplus, producer
surplus, and total surplus.
b. Now suppose that the independent supermarkets combine into one chain. Using a
new diagram, show the new consumer surplus, producer surplus, and total surplus.
Relative to the competitive market, what is the transfer from consumers to
producers? What is the dead-weight loss?

Answer 1

a. If the market is competitive, then there is no dead-weight loss, consumer surplus is a triangle between the demand curve and price level, producer surplus is a rectangle below the price level, and total surplus is maximized.
b. If the independent supermarkets combine into one chain and the market becomes monopolistic, then the consumer and producer surplus will decrease, total surplus won't be maximized and the dead-weight loss will be created.