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In a regulated monopoly, using average cost pricing, the long-run average cost of production is constant at $12 per unit
In a regulated monopoly, using average cost pricing, the long-run average cost of production is constant at $12 per unit. Suppose firm X acquires Y at a cost of $24 million and increases the price to $8. At the new price, X sells 2 million units per year.
a. The acquisition causes X's annual profit to (increase, decrease, or stay the same) by how much (enter your response as an integer)?
b. How many years will it take for X to recover the cost of acquiring? Y?
Expert Solution
a) Profit
Profit = (P-ATC)*Q
Profit = (8-12)*2
Profit = -$8 million
The profit will be negative in terms of loss. It will decrease by $8 million.
b) Years
Years=CostLossYears=CostLoss
Years=248Years=248
Years = 3
Average cost:
The average cost is the per-unit cost in producing goods and it is the ratio of the total cost to quantity. As quantity rises then the average cost falls and as quantity falls than average cost rises. It is indirectly related to the average cost.
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