In the morning newspaper you read an article stating that as

In the morning newspaper, you read an article stating that as a result of the instant monopolization of the local cell phone market, consumers’ surplus fell by $2,000 due to lower equilibrium output, and by $3,000 due to higher prices charged in the market. As a result of the new and higher prices, producer surplus increased by $3,000, but it fell by $2,000 due to the lower equilibrium output under the monopoly. What is the value of deadweight loss, assuming that the cell phone market was originally perfectly competitive and in equilibrium?

A. $3,000.

B. $4,000.

C. $5,000.

D. $6,000.

E. $7,000.

Solution

Net decrease in consumer surplus (CS) = $(2,000 + 3,000) = $5,000

Net increase in producer surplus (PS) = $(3,000 - 2,000) = $1,000

Deadweight loss = Net decrease in CS - Net increase in PS = $(5,000 - 1,000) = $4,000

Correct option (B).