Suppose that the only two firms in an industry face the market (inverse) demand
ID: 1122538 • Letter: S
Question
Suppose that the only two firms in an industry face the market (inverse) demand curve p=100-Q. Each has constant marginal cost equal to 10 and no fixed costs. Initially the two firms compete as Cournot rivals (Chapter 11) and each produces an output of 30. Why might these firms want to merge to form a monopoly? What reason would antitrust authorities have for opposing the merger? (Hint: Calculate price, profits, and total surplus before and after the merger.) The firms would favor the merger because combined profit would increase by rounded to two decimal places.) and the profit-maximizing price would increase by S (Enter your response sand total surplus would decrease by S(Enter your Antitrust regulators would oppose the merger because consumer surplus would decrease by $ response rounded to two decimal places.)Explanation / Answer
profit maximizng price before merger = P = 100 - 60 = $40
and quantity of each firm = 30
MC = 10
Total profit of before merger = (60 * 40 ) - ( 60 * 10)
total profits = 2400 - 600 = $1800
after merger = , price and quantity,
MR = 100-2Q and MC = 10
100-2Q = 10
Q = 45
P = 100 -45 = $ 55
profit = ( 55*45) * (45 *10 )
profits = 2475 - 450 = $2025
so, two firms favor the merger becasue combined profit would increase by $225 and the profit-maximizing price would increase by $15.
consumer surplus before merger = 1/2 * 60*60 = $1800
consumer surplus after merger = 1/2 * 45*45 = 1012.5
producer surplus before merger = 1/2 * 30*60 = $900
producer surplus after merger = 1/2 * 45*45 = 1012.5
total surplus before merger = $2700
total surplus after merger = $2025
antithrush regulators would oppose the merger because consumer surplus would decrease by $787.5 and total surplus would decrease by $675.
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