Deadweight Loss from a Merger. Consider a market that is initially served by two

Question

Deadweight Loss from a Merger. Consider a market that is initially served by two firms, each of which charges a price of $10 and sells 100 units of the good. The long-run average cost of production is constant at $4 per unit. Suppose a merger increases the price to $12 an reduces the total quantity sold from 200 to 150 Compute the loss in consumer surplus associated with the merger sI enter your response as a positive integer) Compute the gain in profit S(enter your response as a positive integer) What is the net loss from the merger? s (enter your response as a postive integer)

Explanation / Answer

Loss in consumer surplus = Increase in price x Reduction in quantity = (12 - 10) x (150 - 200) = -100 (Use positive sign)

Gain in profit = (12 - 4) x 150 - (10 - 4) x 200 = $0.

Hence the net loss from merger is 100 because there is no gain from merger and consumer surplus is reduced.

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