Venture Company's formation
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1. Consider the attached graph. Suppose that Sony Company and American Company jointly form a new firm, Venture Company, whose ball bearings replace the output sold by the parents in the domestic market. Assuming that Venture Company operates as a monopoly and that its costs equal MC0=AC0, what would be the firm's price, output, and total profit ?
2. Consider the attached graph. Assume Venture Company's formation yields new cost reductions, indicated by MC1=AC1, which result from technological advances. Realizing that Venture Company results in a deadweight loss of consumer surplus, what is the net effect of Venture Company's formation on the welfare of the domestic economy?
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Solution Summary
Price, output, and total profits are highlighted.
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Question 1
If a firm operates as a monopoly, it will choose a quantity such that its Marginal Revenue (MR) equals its Marginal Cost (MC). At this point, profit of the monopoly will be maximized. So in order to find Venture Company's price, we must check the graph and see where MR equals MC. Clearly, this happens when the quantity of ball bearnings in the market is 2. Now, using the demand curve (D), we find that when output is 2, consumers are willing to pay $6 for each. So we know that the firm's price is $6 and output is 4. Total profit is
(Total Income - Total Cost)
The firm's selling 2 ball bearings at $6 each, so its total income is $12. From the AC0 (average cost) curve, we know that when the firm's output is 2, average cost is $4 (as a matter of fact, in this case AC is flat at $4, so it's the ...
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