Text Question 3.1 Question Help Suppose that the only two firms in an industry f

Question

Text Question 3.1 Question Help Suppose that the only two firms in an industry face the market (inverse) demand curve p 160-Q Each has constant marginal cost equal to 16 and no fixed costs. Initially the two firms compete as Cournot rivals (Chapter 11) and each produces an output of 48. 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 $576 and the profit-maximizing price would increase by S 24. (Enter your response rounded to two decimal places.) (Enter your response Antitrust regulators would oppose the merger because consumer surplus would decrease by S and total surplus would decrease by $ rounded to two decimal places.)

Explanation / Answer

P = 160-Q

P = 160 - 96

= $ 64

Profit of Cournot = 96*64 - 16*96

= 6144 - 1536

= $ 4608

Price, output and profits in Monopoly:

TR = 160Q - Q2

MR = 160 - 2Q

MR = MC

160 - 2Q = 16

2Q = 144

Q = 72

P = 160 - 72

= $ 88

Profit = 88*72 - 16*72

= 6336 - 1152

= 5184

Combined profit will rise by ; 5184 - 4608

= $ 576

Price will increase by : 88 - 64

= $ 24

Consumer surplys will decrease by = 0.5 ( 88 -64)(96-72)

= 0.5 (24)(24)

= 288

Loss of PS = 48*24

= 1152

TS decrease by 1440 ( 1152+288)

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