Seminar Qs

Question 1

Differentiating DWL with respect to a and b helps show what?

Answer 1

dDWL/da > 0 a is market size: we see as market size increases, DWL increases (makes sense as monopoly is underproducing on a larger scale!)

dDWL/db < 0 b is elasticity of demand: negative as inverse relationship shows us as more elastic, DWL decreases! (Since consumers more responsive so monopolist can’t raise prices much - smaller DWL)

Question 2

2 reasons why DWL is understated

Answer 2

Rent seeking - use rents/extract surplus to maintain market power opposed to investing in productive activities, so true costs rise (so understated!)

Productive inefficiency - lack of competitive pressure to minimise costs, thus X-inefficiency arises and inefficiency production methods.