MICRO Economics help?

Question

There are a few questions on my homework that I can't seem to figure out... any help would be appreciated.

* For a monopsonist, explain the relationship between supply and MRC and MRP.

* A proposed merger will simultaneously reduce unit costs through economies of scale and reduce competition within a particular industry. Describe the dilemma of regulators in evaluating the merits of such a merger.

I have no idea what that second question is asking.

Please help~! Thank you in advance.

Answer 1

Second question: regulators want to make sure the merger benefits consumers. If costs go down, it could benefit consumers.  But if competition goes down, would the lower costs benefit consumers?

Answer 2

A monopolist sets MRC = MRP instead of setting P = MRC which is what occurs in perfect competition. The reason for doing this is because the monopolist has control of the entire supply market and so increasing or decreasing the quantity of output will effect the price the good is commanding. So MRC is increasing as output increases and MRP is decreasing as output increases. When you reach the level output that sets these equal you found the optional output level for a monopoly.

Theory of regulation deals with how monitoring boards and organisms designed to monitor and regulate industry structure make their regulations. The regulator needs to consider first that economies of scale lead to a decrease in the costs of production so there is a potential for increased benefit to society. We can measure benefit as the area between the demand and supply curve. Consumer benefit is the area above the horizontal line that is price below the demand curve. Producer surplus below the price above the supply curve. A monopoly that is going to benefit from economies of scale has a lower supply curve hence a greater area for producer surplus.

That being said the dilemma is that the monopoly also constricts output below the socially optimal level because it can command a higher price by reducing output until MRC = MRP. The regulator has to consider which of these two situations has the greatest social benefit.

The criterion for social benefit can either but a direct sum of Consumer Surplus + Producer Surplus or it can be a weighted sum of these two (some people argue that consumer surplus is more important).