The figure below shows the market conditions facing two firms, Brooks, Inc., and Spring, Inc., in the domestic market for large utility pumps. Each firm has constant long-run costs, so that MC0 = AC0. As competitors in a duopoly, there are a number of models to determine output and prices. Assume that the Bertrand duopoly model applies, so that they both set price equal to their marginal cost. Initial output in this market will be 16,000 per year (this is split between the two firms), at a price of $300. Suppose that Brooks, Inc. and Spring, Inc. form a joint venture, River Company, whose utility pumps replace the output sold by the parent companies in the domestic market. Assuming that River Company operates as a monopolist and that its costs equal MC0 = AC0, what is: (f) Assume River Company’s formation leads to technological advances that yield cost reductions, such that MC1 = AC1. Compared to the original equilibrium (in (a)), what is the net effect of River Company’s formation on welfare? (Calculate the new total surplus (consumer surplus + producer surplus), and take the difference from your answer to (a).) **Figure 1: Large Utility Pump Market**This graph illustrates the market dynamics for large utility pumps. The x-axis represents the quantity of pumps sold per year in thousands, ranging from 0 to 34. The y-axis shows the price in dollars, ranging from $0 to $650.Key elements in the graph include:- **Demand Curve (D)**: This downward-sloping line reflects the relationship between price and quantity demanded. - **Marginal Revenue Curve (MR)**: This is derived from the demand curve and shows the additional revenue from selling one more unit.- **Marginal Cost equals Average Cost Curves (MC₀ = AC₀ and MC₁ = AC₁)**: These horizontal lines represent different levels of constant marginal and average costs.- **Plot Area**: The area under consideration for analysis.Below the graph, there is a question regarding economic surplus:(a) At the initial equilibrium, what is total surplus (consumer surplus plus producer surplus)?This question invites an analysis of the consumer and producer surplus areas at the equilibrium point where the quantity supplied equals quantity demanded. Total surplus is a measure of the overall benefits to society, combining both consumer and producer benefits from trade.

Initial Marginal cost is denoted from MC0 New Marginal cost is denoted from MC1Consumer Surplus = 12*(∆ in Price)*(∆ in Qty)Consumer Surplus = 12*(150)*(8000)Consumer Surplus = 6,00,000Producer SurplusProducer Surplus = area of rectangleProducer Surplus = 8,000*(450-300)Producer Surplus = 8,000*150Producer Surplus = 1,200,000Total Surplus = CS +PSTotal Surplus = 6,00,000 + 1,200,000Total Surplus = 1,800,000 Consumer Surplus = 12*(∆ in Price)*(∆ in Qty)Consumer Surplus = 12*(200)*(12000)Consumer Surplus = 1,200,000Producer SurplusProducer Surplus = area of rectangleProducer Surplus = 12,000*(400-150)Producer Surplus = 12,000*250Producer Surplus = 3,000,000Total Surplus = CS +PSTotal Surplus = 1,200,000 + 3,000,000Total Surplus = 4,200,000Therefore overall welfare increase by 2,400 (4,200,000 - 1,800,000)

Answered: The figure below shows the market…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The figure below shows the market conditions facing two firms, Brooks, Inc., and Spring, Inc., in the domestic market for large utility pumps. Each firm has constant long-run costs, so that MC0 = AC0. As competitors in a duopoly, there are a number of models to determine output and prices. Assume that the Bertrand duopoly model applies, so that they both set price equal to their marginal cost. Initial output in this market will be 16,000 per year (this is split between the two firms), at a price of $300.

Suppose that Brooks, Inc. and Spring, Inc. form a joint venture, River Company, whose utility pumps replace the output sold by the parent companies in the domestic market. Assuming that River Company operates as a monopolist and that its costs equal MC0 = AC0, what is:

(f) Assume River Company’s formation leads to technological advances that yield cost reductions, such that MC1 = AC1. Compared to the original equilibrium (in (a)), what is the net effect of River Company’s formation on welfare? (Calculate the new total surplus (consumer surplus + producer surplus), and take the difference from your answer to (a).)

**Figure 1: Large Utility Pump Market**

This graph illustrates the market dynamics for large utility pumps. The x-axis represents the quantity of pumps sold per year in thousands, ranging from 0 to 34. The y-axis shows the price in dollars, ranging from $0 to $650.

Key elements in the graph include:

- **Demand Curve (D)**: This downward-sloping line reflects the relationship between price and quantity demanded.

- **Marginal Revenue Curve (MR)**: This is derived from the demand curve and shows the additional revenue from selling one more unit.

- **Marginal Cost equals Average Cost Curves (MC₀ = AC₀ and MC₁ = AC₁)**: These horizontal lines represent different levels of constant marginal and average costs.

- **Plot Area**: The area under consideration for analysis.

Below the graph, there is a question regarding economic surplus:

(a) At the initial equilibrium, what is total surplus (consumer surplus plus producer surplus)?

This question invites an analysis of the consumer and producer surplus areas at the equilibrium point where the quantity supplied equals quantity demanded. Total surplus is a measure of the overall benefits to society, combining both consumer and producer benefits from trade.

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