Pre-mixed concrete is an important input for the construction industry. Concrete cannot be stored or transported over long distances as it begins to set after only a few hours. For this reason, only the three local firms—Aggregate Inc., Big Industries and ConCorp—are in a position to compete in the market. Moreover, the capital and regulatory requirements for constructing a new concrete plant are substantial, creating an effective barrier to entry. Pre-mixed concrete is regarded as a homogeneous good by the construction industry. Inverse demand in the market has been estimated to be, P = 520 − Q , 50 where P represents the price of a cubic metre of concre
Pre-mixed concrete is an important input for the construction industry. Concrete cannot be stored or transported over long distances as it begins to set after only a few hours. For this reason, only the three local firms—Aggregate Inc., Big Industries and ConCorp—are in a position to compete in the market. Moreover, the capital and regulatory requirements for constructing a new concrete plant are substantial, creating an effective barrier to entry. Pre-mixed concrete is regarded as a homogeneous good by the construction industry. Inverse demand in the market has been estimated to be,
P = 520 − Q , 50
where P represents the price of a cubic metre of concrete in dollars, and Q is the total number of cubic metres of concrete supplied into the market on a given day. At present the three firms appear have identical production costs, with each firm facing fixed costs of $400,000 per day and a marginal cost of $160 per cubic metre. Big Industries and ConCorp estimate that the proposed merger would reduce their marginal cost to $145 per cubic metre, while the merged firm is expected to face fixed costs of $600,000 per day.
When completing the industry analysis you should assume that firms are engaged in Cournot Competition. Steps 1 to 4 apply to the market in the absence of a merger.
Step 1: Using the information provided in the scenario, derive a profit function for a typical firm in the industry. Use QA to denote the quantity produced by this firm, and X to denote the combined production of the remaining two firms.
Step 2: Derive the best-response function for the typical firm.
Step 3: Find the
Step 4: Find the equilibrium profit for the typical firm and the equilibrium consumer sur- plus. (6 marks)
Steps 3 and 4 describe the existing equi- librium in the market.
Now suppose that the merger takes place and that the merged firm achieves the expected efficiencies. (Note that Aggregate Inc.’s costs are not be affected by the merger.)
Step 5: Find the new equilibrium quantities and price for the market. Use QA to denote the quantity produced by Aggregate Inc., and QB to denote the quantity produced by the merged firm, BigCon.
Step 6: Find the new equilibrium firm profits and
(Believe just need Steps 4-6, answers 1-3 here: https://www.bartleby.com/questions-and-answers/pre-mixed-concrete-is-an-important-input-for-the-construction-industry.-concrete-cannot-be-stored-or/b9bc54b4-ab7c-4528-8555-c0172d7ee951)
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