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Is there a reason why people use large CRT monitors
Yes, for the retro arcade look. There's something about arcade cabinets and the big monitors that evokes a certain feeling. It makes it feel exactly like the original arcade game, instead of feeling like an emulator playing on a PC.
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I would like to make a thin cab that takes an LCD to keep the space down, would it work well on a LCD?
Yes, but at that point it wouldn't be much different than a PC with a fancy joystick. Part of the fun is the cabinet and the monitor.
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