2. A small town is served by many competing supermarkets, which have the same constant marginal cost. a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus,…
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Question “2. A small town is served by many competing supermarkets, which have the same constant marginal cost. a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus,…”
2. A small town is served by many competing supermarkets, which have the same constant marginal cost. a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus, and total surplus. b. Now suppose that the independent super- markets combine into one chain. Using a new diagram, show the new consumer surplus, producer surplus, and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the deadweight loss?
Answer
A) If the market is competitive, the firm will set P=MC to maximize profit. Q=QC or P=PC are the two options. This ensures that there is no surplus producer or deadweight loss as long as the market is producing efficient output.
B) If the market becomes monopoly, the firm will establish MC=MR profit maximization, where Q=QM is and P=PM is. The consumer surplus will decrease, the blue shaded area will be transferred to the producer, and the grey area represents the loss of deadweight.
Conclusion
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