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Suppose that an industry is currently performing competitively
Suppose that an industry is currently performing competitively. a. If the inverse demand function is P(q) = 200 - q and LRMC = LRAC = 50, what are the output and price? b. If a series of mergers monopolizes the industry and results in lower costs such that LRMC = LRAC = 40, what happens to industry output and price? Does this series of mergers improve welfare? c. If the mergers reduced monopolist's costs to LRMC = LRAC = 20, would the mergers improve welfare?
Expert Solution
In a long run equilibrium, the price equals the marginal cost,
A) Hence, P= LRMC=LRAC= 50
Hence 50= 200-q
q= 150. p= 50
B) P=LRMC=LRAC= 40
Hence, 40= 200-q
q= 160, p=40. In the second case, since the price decreased, the units bought increased. Hence it definetely increases the welfare.
C) If the cost is reduced to 20, the units sold would amount to 180. Since it will increase the demand even further, allowing more demand to be fullfilled, the welfare would be improved.
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