443: Economics of Law and RegulationHomework Assignment 3 Solutions Chapters 6 and 7These are the solutions to homework assignment #3.Problem 1: Horizontal Merger Analysis and Price-Cost Margins. An industryconsists of six firms. The absolute value of the elasticity of demand is µ = 1, and themarginal cost of production is 25.(a) There are initially six firms of equal size in the industry. The fi
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443: Economics of Law and Regulation
Homework Assignment 3 Solutions Chapters 6 and 7
These are the solutions to homework assignment #3.
Problem 1: Horizontal Merger Analysis and Price-Cost Margins. An industry
consists of six firms. The absolute value of the elasticity of demand is µ = 1, and the
marginal cost of production is 25.
(a) There are initially six firms of equal size in the industry. The firms compete by choosing
quantities simultaneously. What is the price of the good in equilibrium?
(b) Now assume that the six firms divide to two groups of three firms each, and each group
merges. The result is two firms of equal size. Each merged firm can now produce at
marginal cost of 20. The firms compete by choosing quantities simultaneously. What
is price of the good in equilibrium?
(c) Assume that the aggregate demand for the product is Q = 50 - P. Calculate the
surplus (consumer, producer, total) before and after the merger. Based on the total
surplus, should the merger be approved?
Hint: For parts (a) and (b), you can use the formula P -PMC = nµ 1 , where n is the number of
firms.
Answer 1
(a) Use the formula P -PMC = nµ 1 to find prices. Plugging in MC; n; µ we have P -P25 = 1 6.
) 6P - 150 = P
) P = 30
(b) Use the same formula again
P - 20
P
=
1 2
) 2P - 40 = P
) P = 40
1
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