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7. Welfare effects of international joint ventures 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. Suppose Giocattolo of Italy and American Toy Company of the United States are the only two firms producing toys 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 long-term market supply schedule for toys. Suppose Giocattolo and American Toy Company operate as competitors, and the cost schedules of each company are MCO = ATCo = $7. 20 On the following graph, use the grey point (star symbol) to identify the competitive market equilibrium. Then, use the green triangle (triangle Joint Venture Equilibrium symbols) to identify consumer surplus in this case. 14 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. 12 CS under JV PRICE (Dollars pertoy) 10 MC CS transferred to PS MC. Cost-Reduction Effect MR Demand + Competitive Equilibrium 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 Deadweight Loss QUANTITY OF TOYS CS under Competition As a result of the joint venture, consumer surplus decreases and producer surplus increases. On the consumer side, some of the lost consumer surplus PRICE (Dollars pertoy) 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. MC 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. N On the previous graph, use the purple rectangle (diamond symbols) to shade the area of new producer surplus that was previously consumer surplus MR Demand 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. 2000 4000 6000 8000 10060 12060 14060 16060 18060 20060 Finally, use the black area (plus symbol) to indicate the deadweight loss caused by the joint venture. QUANTITY OF TOYS 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. Suppose Giocattolo and American Toy Company form a joint venture known as JV Company, which manufactures toys for sale in the United States at Based on your analysis, from a welfare perspective, the formation of JV Company is because the cost-reduction effect is the lower cost of MC1 = ATC1 = $6 and operates as a monopoly. than the deadweight loss (or consumption effect). Grade It Now Save & Continue