7. Welfare effects of international joint ventures Suppose Jeonsangi of Korea and American Computer Company of the United States are the only two firms producing computers for sale in the U.S. market. Each firm realizes constant long-term costs so that the average total cost (ATC) equals the marginal cost (MC) at each level of output. Thus, MCO = ATCo is the longterm market supply schedule for computers. Suppose Jeonsangi and American Computer Company operate as competitors, and the cost schedules of each company are MCo = ATCO = $70. On the following graph, use the grey point (star symbol} to identify the competitive market equilibrium. Then, use the green triangle (triangle symbols) to identify consumer surplus in this case. Note: Select and drag the point from the palette to the graph. Dashed drop lines will automatically extend to both axes. Then select and drag the shaded region from the palette to the graph. To resize the shaded region, select one of the points and move to the desired position. /'\\ K7,\" 200 n: 180 160 Competitive Equilibrium 140 120 CS under Competition 100 80 MC PRICE (Dollars per computer) 40 20 MR Demand 0 l l | l l l | i 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 QUANTITY OF COMPUTERS Download: Suppose Jeonsangi and American Computer Company form a joint venture known as JV Company, which manufactures computers for sale in the United States at the lower cost of MC1 = ATC1 = $60 and operates as a monopoly. On the following graph, use the grey point (star symbol) to identify the new equilibrium under a joint venture. Then use the green triangle (triangle symbols) to identify the new consumer surplus. 200 - 180 160 140 120 100 80 60 PRICE (Dollars per computer) 40- 20- 0 l MC MC MR Demand 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 As a result of the joint venture, consumer surplus decreases and producer surplus increases. On the consumer side, some of the lost consumer surplus is transferred to the joint venture in the form of producer surplus, but the consumption effect still causes a deadweight welfare loss for the U.S. economy. On the producer side, while part of the gain in producer surplus is a transfer from consumer surplus, the rest is the result of the cost- reduction effect. QUANTITY OF COMPUTERS Joint Venture Equilibrium CS under JV H CS transferred to P8 Cost-Reduction Effect Deadweight Loss Downloads g 120 CS under JV 5 3 100 m E B 80 9 MC CS transferred to PS LL! 0 Q 50 \\ n: D. MC1 40 Cost-Reduction Effect MR Demand - 0 2000 4000 5000 8000 10000 12000 14000 16000 10000 20000 DeadweightLoss QUANTITY OF COMPUTERS 20 As a result of the joint venture, consumer surplus decreases and producer surplus increases. On the consumer side, some of the lost consumer surplus is transferred to the joint venture in the form of producer surplus, but the consumption effect still causes a deadweight welfare loss for the U.S. economy. On the producer side, while part of the gain in producer surplus is a transfer from consumer surplus, the rest is the result of the cost- reduction effect. On the previous graph, use the purple rectangle (diamond symbols) to shade the area of new producer surplus that was previously consumer surplus before the joint venture. Then use the grey rectangle (star symbols) to shade the area of new producer surplus as a result of the cost-reduction effect. Finally, use the black area (plus symbol) to indicate the deadweight loss caused by the joint venture. Note: Select and drag the fill area point from the palette to the graph. To fill in regions on the graph, merely drop the fill area point on the desired region. Based on your analysis, from a welfare perspective, the formation of JV Company is v because the cost-reduction effect is V than the deadweight loss (or consumption effect)