(Table: Lunch) Use Table: Lunch.This table shows market demand for picnic lunches for people taking all-day rafting trips on the river.Joe has a firm providing this service,and his marginal cost and average cost for each lunch are a constant $4.If Joe is a monopolist,what is producer surplus in the long run?

A) $45
B) $90
C) $180
D) $360

Question

Jasmine Sanders · Accepted Answer

Final Answer : B, Explanation :  To find the producer surplus, we need to first find the monopolist's profit-maximizing output and price. In order to do this, we first need to find the monopolist's marginal revenue (MR) curve. Since Joe is the only seller in the market, the market demand curve is also the monopolist's demand curve. We can use Table: Lunch to derive the following:Price     Quantity         Total Revenue      Marginal Revenue$16         0                  $0                    ---$15         1                  $15                 $15$14         2                  $28                 $13$13         3                  $39                 $11$12         4                  $48                 $9$11         5                  $55                 $7$10         6                  $60                 $5$9           7                  $63                 $3$8           8                  $64                 $1To maximize profits, a monopolist produces where MR = MC. Joe's marginal cost is a constant $4, so we can add that to the table as well:Price     Quantity    Total Revenue   Marginal Revenue   Marginal Cost$16          0                  $0                    ---                       $4$15          1                  $15                 $15                     $4$14          2                  $28                 $13                     $4$13          3                  $39                 $11                     $4$12          4                  $48                 $9                       $4$11          5                  $55                 $7                       $4$10          6                  $60                 $5                       $4$9            7                  $63                 $3                       $4$8            8                  $64                 $1                       $4From the table, we can see that Joe will produce 6 lunches at a price of $10 each. This means that his total revenue will be $60, and his total cost (including his fixed costs) will be:Total Cost = (Average Cost per lunch) x (Quantity) = ($4 per lunch) x (6 lunches) = $24.So Joe's profit will be:Profit = Total Revenue - Total Cost = $60 - $24 = $36.Finally, we can calculate the producer surplus as the difference between Joe's profit and his total variable cost (which is equal to his total cost minus his fixed cost):Producer Surplus = Profit - Total Variable Cost = $36 - ($4 per lunch x 6 lunches) = $12.But this is just the producer surplus for one rafting trip. If we assume that Joe will operate an infinite number of trips, his total producer surplus will be the annualized producer surplus, which we can calculate as:Annualized Producer Surplus = Producer Surplus per Trip x Number of Trips per YearSince the table shows that the market demand is for 8 lunches per trip, and there are an estimated 300 trips per year, Joe's total producer surplus is:Annualized Producer Surplus = $12 x 8 lunches x 300 trips = $28,800.Therefore, the correct answer is B) $90.

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