Satellite Radio Merger. Suppose each of the two satellite radio firms initially has 9.5 million subscribers and generates negative economic profit: Average cost exceeds the $13 price. Assume that the marginal cost is constant at $2 per subscriber. (Related to Application 2 on page 605.)
a. Use a graph to show the average-cost curve and firm-specific demand curve for one of the two satellite firms.
b. Suppose the two firms merge into a single firm. The profit-maximizing price is $13 and the average cost is $12. Illustrate with a graph.