Economics A firm develops a new consumable good with no other firms currently in the market...

Economics

A firm develops a new consumable good with no other firms currently in the market and has the following cost curves:

a) What could be the determinants of market power for a firm like this? Is there a typical determinant of market power that would not apply in this case?

b) What is the price and quantity the firm will trade at? What is the profit? (Draw the areas using the graph above as the starting point)

c) How would these results change if the firm behaved as if it had no market power? (Draw the areas using the graph above as the starting point)

d) Since the average total cost decreases (until the intersection with the MC curve) beyond the correct point in (b) why does the firm not produce additional units?

The firm receives feedback from its customers that they want a more affordable option. In response to this they release a new 6 pack version which is sold at a per unit price of between the prices in (b) and (c). It is assumed that anyone who can afford to purchase the smaller quantity of the good will also buy the 6 pack.

e) What degree of price discrimination is this likely to represent?

f) How do you predict total, producer and consumer surplus to change? Why? Using the diagram, show the new areas of surplus.

Expert Solution

Rahul Sunny answered 6 months ago

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