Question

    Sheet steel is used in the manufacture of many different products, including refrigerators and other household appliances, automobiles, and airplanes.  Automobiles comprise only a small portion of the total industry demand for sheet steel. Assume there are only three producers of steel in the US, that they produce all of the sheet steel sold in America, and that they currently behave as perfect competitors. Assume there are no foreign steel producers who export to America.  

a) Identify the welfare triangle for the production and sale of steel in America. Describe what the welfare triangle means in plain English words, and also show it on a graph.

b) Show what happens to that triangle, if anything, if all American auto manufacturers merge into a single company.  Explain what happens in plain English, and on the graph.

c) Show what happens to that triangle, if anything, if the three American steel producers merge into a single company.  Explain what happens in plain English, and on the graph.

Answer 1

(a)

The yellow triangle shows the consumer surplus. Whereas the green triangle shows the producer surplus.

Producer surplus is the difference between how much a producer is willing to accept for a given quantity and the market price he is getting for that given quantity.

(b)

If automobiles companies merge then the quantity they produce will decrease. Hence the quantity demanded sheet stell will also fall. It will lead to a decrease in price and quantity demanded in the market.

The producer surplus will also decrease.

(c)

If all three stell producers merge then they will act like a monopoly. Hence they will maximize its profits as MR=MC.

they will have supernormal profit in market as shown in diagram above.