For many decades, the Royal Mail had a legal monopoly in the U.K. Companies in the postal business have increasing returns to scale, then constant returns to scale, and then decreasing returns to scale. The Royal Mail’s minimum average cost is £2 at 100 million deliveries and its minimum marginal cost is £1 at 75 million deliveries. The demand for postage is zero at a price of £10, and demand is 300 million deliveries at a price of £0. Marginal revenue is zero at a price of £10 and 150 at a price of £0. Note: Unless otherwise stated, the numerical answers in this question do not need to be exact but should correspond to how you have drawn your graph. New technology changes delivery firms’ technology. Now, the minimum average cost is £2 at 1 million deliveries and a minimum marginal cost of £1 at 0.75 million deliveries. The government removes all price restrictions and allows free entry. Describe the long-term outcome for this market, using two graphs, one at the firm-level and one at the market-level. How many firms will be operating in the long-run? Note: a precise answer is possible for this question.
For many decades, the Royal Mail had a legal
postal business have increasing returns to scale, then constant returns to scale, and
then decreasing returns to scale. The Royal Mail’s minimum average cost is £2 at 100
million deliveries and its minimum marginal cost is £1 at 75 million deliveries.
The demand for postage is zero at a price of £10, and demand is 300 million
deliveries at a price of £0. Marginal revenue is zero at a price of £10 and 150 at a
price of £0.
Note: Unless otherwise stated, the numerical answers in this question do not need to
be exact but should correspond to how you have drawn your graph.
New technology changes delivery firms’ technology. Now, the minimum
average cost is £2 at 1 million deliveries and a minimum marginal cost of £1
at 0.75 million deliveries. The government removes all price restrictions and
allows free entry. Describe the long-term outcome for this market, using two
graphs, one at the firm-level and one at the market-level. How many firms will
be operating in the long-run? Note: a precise answer is possible for this
question.
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