Figure 9.1 illustrates the market conditions facing SKF and Timken, initially operating as competitors in the domestic ball bearing market. Each firm realizes constant long-run costs, MC₀=AC₀.
Figure 9.1. International Joint Venture

-Consider Figure 9.1.Assume Venture Company's formation yields new cost reductions, indicated by MC₁=AC₁, which result from changes in work rules by Venture Company employees that led to higher worker productivity.Compared to the original competitive equilibrium, the net effect of Venture Company's formation on welfare now is

Question

Figure 9.1 illustrates the market conditions facing SKF and Timken, initially operating as competitors in the domestic ball bearing market. Each firm realizes constant long-run costs, MC₀=AC₀.
Figure 9.1. International Joint Venture

-Consider Figure 9.1.Assume Venture Company's formation yields new cost reductions, indicated by MC₁=AC₁, which result from changes in work rules by Venture Company employees that led to higher worker productivity.Compared to the original competitive equilibrium, the net effect of Venture Company's formation on welfare now is

Quizplus · Accepted Answer

The formation of the Venture Company leads to a reduction in costs due to increased worker productivity, which shifts the industry supply curve from S1 to S'1. The new equilibrium price is P1 and quantity is Q1. Compared to the original competitive equilibrium, both consumer surplus and producer surplus have increased. The gain in consumer surplus is represented by the area A+B+C and the gain in producer surplus is represented by the area D+E+F. The total gain in welfare is therefore the sum of the gains in consumer and producer surplus, which is $5.50 (A+B+C+D+E+F). Therefore, the net effect of Venture Company's formation on welfare is a gain of $5.50.

Figure 91 Illustrates the Market Conditions Facing SKF and Timken, Initially