Open Word and answer the following questions. Save the document and print it when you are done. Suppose the inverse demand curve is P = 1000 - 0.5Q, marginal cost is constant at $100 per unit, and the world price is $50. Enter these parameter values in the Compare sheet and answer the questions below. Enter the demand slope as a positive number, 0.5, and click one of the market structure options to refresh the chart. The math theory prep section showed two surprising results. First, consumers' and producers' surplus under the cement cartel do not depend on the marginal cost of capacity. Second, as the number of firms in the cartel rises, the likelihood a merger to monopoly will be welfare enhancing rises. To answer the questions that follow, taking pictures is helpful. You can select cells (e.g., A1:M25) and copy as a picture, then paste.
1. Increase MC from 100 to 200 and determine the impact on the cartel's Q, P, CS, PS, DWL, and export loss. What happens to each of these variables as MC rises? Be sure to click the Perfect Competition and then Cartel option button to refresh the data below the buttons.
2. Which changes, if any, in the variables are surprising? Why?
3. At what value of MC will there be no exports? Take a picture of this situation and paste it in your Word document.
4. Increase the number of firms from 3 to 5 (with MC at the no export loss value). What effect does this have on the cartel's Q, P, CS, PS, DWL, and export loss?
5. What can you conclude about the effect of the number of firms on PS from a merger to monopoly (from the cartel)?