The figure below shows the market conditions facing two firms, Brooks, Inc., and Spring, Inc., in the domestic market for large utility pumps. Each firm has constant long-run costs, so that MC0 = AC0....

The figure below shows the market conditions facing two firms, Brooks, Inc., and Spring, Inc., in the domestic market for large utility pumps. Each firm has constant long-run costs, so that MC0 = AC0. As competitors in a duopoly, there are a number of models to determine output and prices. Assume that the Bertrand duopoly model applies, so that they both set price equal to their marginal cost. Initial output in this market will be 16,000 per year (this is split between the two firms), at a price of $300.

(a) At the initial equilibrium, what is total surplus (consumer surplus plus producer surplus)?

Suppose that Brooks, Inc. and Spring, Inc. form a joint venture, River Company, whose utility pumps replace the output sold by the parent companies in the domestic market. Assuming that River Company operates as a monopolist and that its costs equal MC0 = AC0, what is:

(b) The price?

(c) The output?

(d) Total profit?

(e) The resulting deadweight loss from River Company operating as a monopoly?

(f) Assume River Company’s formation leads to technological advances that yield cost reductions, such that MC1 = AC1. Compared to the original equilibrium (in (a)), what is the net effect of River Company’s formation on welfare? (Calculate the new total surplus (consumer surplus + producer surplus), and take the difference from your answer to (a).)

(g) Assume River Company’s formation leads to wage concessions from River Company employees, such that MC1 = AC1. Compared to the original equilibrium, what is the net effect of River Company’s formation on welfare?

(h) Assume River Company’s formation leads to changes in work rules that lead to higher worker productivity, such that MC1 = AC1. Compared to the original equilibrium, what is the net effect of River Company’s formation on welfare?